The Fed, Mortgage Rates, and What You Need to Know

Federal Reserve Chair Jerome Powell recently gave an important speech at the Jackson Hole symposium, where he attributed high inflation mainly to supply chain issues caused by the pandemic and the conflict in Ukraine. While many agree with Powell’s analysis, I personally believe that inflation is more closely tied to the Fed's money printing and government spending. As we've discussed before, it really boils down to supply and demand—the more of something you have, the less it’s worth.

More importantly, Powell hinted that the Fed might start cutting rates at their September meeting, which is welcome news for many. In 2019, CORE inflation was 1.8%, and it’s now down to 2.6%, which is getting closer to the Fed’s target of 2%. Meanwhile, the unemployment rate has risen slightly from 3.6% in 2019 to 4.3% now. The recent report from the Bureau of Labor Statistics confirmed a weakening job market, with 818,000 jobs disappearing from the count. This puts the Fed in a good position to consider a rate cut.

Philly Fed President Patrick Harker also spoke recently, emphasizing that the Fed needs to pay more attention to the labor market after the BLS job revisions. Although he’s not a voting member this year, he suggested the Fed should start cutting rates in September, whether by 25 or 50 basis points. He also mentioned that lowering rates could ease the “lock-in effect” in the housing market, leading to more homes becoming available and possibly making them more affordable. However, I think this view might overlook the surge in demand from buyers waiting for lower rates and from young adults still living with their parents.

Given the recent easing of inflation and signs of a slowing job market, a rate cut on September 18 seems likely. The big question is whether it will be a 25 or 50 basis point cut. Historically, five out of the last six rate cut cycles began with a 50 basis point cut, so it’s definitely possible. But remember, a rate cut in September is already expected and “priced in” to current rate sheets. What’s more significant is that this could be the start of a new cycle of rate cuts.

Historical Perspective on Rate Cuts

Here’s a quick look at some similar rate cuts in the past:
Dot Com Bust: January 3, 2001 – 50 basis point cut
Weak Recovery after Dot Com: November 6, 2002 – 50 basis point cut
Housing Crash: September 18, 2007 – 50 basis point cut
Great Recession: October 8, 2008 – 50 basis point cut
Mid-Cycle Adjustment: August 1, 2019 – 25 basis point cut
COVID-19 Pandemic: March 3, 2020 – 50 basis point cut

If you’re thinking about refinancing, it’s time to get ready, but wait to lock in your rate. Currently, the Fed rate is 5.25-5.5%. Back in 2019, when the Fed rate was 2%, mortgage rates averaged around 4%. As the Fed starts cutting rates, mortgage rates will likely go down too. The best time to refinance is when the savings outweigh the costs.

Market-Moving News This Week

This week is packed with key economic reports and events that could influence the markets and impact interest rates. Today, we start with July’s Durable Goods Orders data, which gives us a sense of how manufacturing is doing.

Durable Goods Orders: Core Durable Goods Orders, excluding transportation, fell by 0.1%, below expectations of a flat reading. While there was a positive revision to the previous month’s data, capital spending remains weak, growing just 1.2% year-over-year, suggesting a slowdown in the economy. Shipments of Core Goods, which are included in GDP calculations, dropped by 0.4%. This decline could lead to lower Q2 GDP estimates, further supporting the case for rate cuts.

This report is important because it’s a key indicator of manufacturing health and business investment. The weakness in core orders and shipments points to a slowdown in economic activity, particularly in capital spending. Since these figures contribute to GDP, the weaker-than-expected data could lead to downward revisions in economic growth estimates—more reasons for the Fed to cut rates.

Tomorrow, we’ll see housing appreciation data for June from Case-Shiller and the Federal Housing Finance Agency, along with the CB Consumer Confidence report, which will gauge how consumers are feeling.

Wednesday is important too, with a highly anticipated earnings report from Nvidia ($NVDA), which could move markets given its role in the tech sector and the AI boom.

Thursday is crucial, with the second reading on Q2 2024 GDP, which might adjust our view of economic growth. We’ll also get July’s Pending Home Sales data, offering insight into the housing market, and the latest Jobless Claims data, a key labor market indicator.

Finally, Friday brings the most important report of the week: the Personal Consumption Expenditures (PCE) inflation data, the Fed’s preferred measure of inflation. This report will be closely watched for signs that inflation pressures are easing, which could influence the Fed's upcoming rate decisions.

We’ve got a busy week ahead, so be ready. If your offers get accepted, remember you need to lock in your rate 7-8 business days before the close date. You might miss a slight dip in rates, but don’t worry—you’ll be in a great position to save more soon. As soon as rates improve and affordability pressures lift a bit, more buyers will start placing offers.

Homeownership: A Growing Luxury

Homeownership has increasingly become a luxury, as affordability has worsened across the U.S. Since February 2020, affordability has dropped by over 40% in all markets, with some seeing declines of more than 100%. While there have been slight improvements in some areas, these gains are often due to cooling prices from unsustainable highs or corrections in traditionally expensive markets. Despite these improvements, affordability remains, on average, 80% lower than pre-pandemic levels, making it much harder for potential buyers to enter the market.

Even though affordability has improved for the second month in a row, consumer sentiment toward buying a home remains low. The Fannie Mae Home Purchase Sentiment Index shows that only 17% of consumers believe it’s a good time to buy, reflecting the significant challenges that remain. For example, in Tampa, where affordability has improved the most over the past year, the monthly mortgage payment on a median-priced home has risen by 160% since 2020, while median household income has only gone up by 19%. This gap highlights why homeownership is increasingly seen as a luxury.

Next Steps for Homebuyers

Let’s take a deep breath—rates are finally starting to improve, and that’s something to celebrate. Here are some things to keep in mind as you shop for a home or consider refinancing.

The Best Time to Buy a House is When It Fits Your Budget: When you’re thinking about buying a home, it’s crucial to make sure it aligns with your budget and long-term financial goals. With mortgage rates improving, now is a great time to explore your options. However, be sure you have a clear understanding of your finances. Consider your income, savings, and potential expenses to determine how much house you can afford. Being financially prepared will make the buying process smoother and ensure you can handle mortgage payments comfortably in the future. You don’t need to wait for the “perfect” moment—if you’re ready and the numbers make sense, it’s a good time to buy. My goal is to help you achieve sustainable homeownership with long-term success in mind.

The Best Time to Refinance is When the Savings Are Worth It: Refinancing can be a smart move if it reduces your monthly payments, shortens your loan term, or provides other benefits. As mortgage rates improve, many homeowners are thinking about refinancing to lock in lower rates. However, it’s important to weigh the costs, like closing fees, against the potential savings. With more rate improvements likely on the horizon, staying informed and calculating your potential savings will help you make the best decision.

Overall, the key is to make informed decisions that align with your financial situation and goals, whether you’re buying a new home or refinancing your current one.