Mortgage industry excitement is subsiding about expected Fed rate cuts in 2024

One of the major takeaways from Federal Reserve Chair Jerome Powell’s Wednesday news conference was that officials still expect interest rates to come down three times this year, indicating that recent higher-than-expected inflation numbers haven’t been enough to derail previous forecasts. As widely anticipated, central bankers left the benchmark interest rate steady at 5.25% to 5.5%.

A fresh set of quarterly economic projections from Fed officials showed that borrowing costs are expected to end the year at 4.6%, suggesting that the central bank still plans to make three cuts of 25 basis points (bps) each in 2024. The so-called dot-plot estimates show the Fed might make one fewer rate cut in 2025 compared to its forecast in December 2023.

Powell, however, offered few hints about when that rate cut might come, reiterating that the central bank is looking at incoming inflation data to get more confidence that annual consumer price growth is coming closer to the 2% target

“Today, the Fed bought itself more time to see more inflation data going out in the next few months and keep its line of ensuring they don’t tip the economy into a recession,” said Logan Mohtashami, lead analyst at HousingWire. “Last year, when the 10-year yield was at this level, they went hawkish, bond yields rose and they believe that was too restive. It seems to me they didn’t want to make that same mistake today.” 

“I don’t expect we’ll see much of a market reaction to the Fed meeting this week because the Fed is waiting for the incoming data, just like the rest of us,” said Danielle Hale, chief economist at Realtor.com.

Timing for potential cut

Going forward, the market will be watching all economic data — including inflation and jobs data — to gauge when the central bank will cut interest rates.

“Although the timing of the cuts and when they will commence is still an open question, the fact that the recent uneven inflation data did not appear to alter the Fed’s projection of three rate cuts in 2024 is reason for optimism,” said Marty Green, principal at Polunsky Beitel Green.

As with investors strengthening their bets of an initial rate cut in June, that same sentiment is shared among housing pros. 

“I anticipate that if inflation continues to be under control, the Fed will begin lowering rates in the second half of 2024,” said Rob Cook, vice president of marketing at Discover Home Loans.

CoreLogic chief economist Selma Hepp expected the earliest implementation of lower rates will likely be in June or even later. As a result, the country is facing “a more anemic than normal spring homebuying season” in most major housing markets, Hepp noted. 

The average 30-year fixed mortgage rate was at 7.09% on Wednesday, compared to 6.66% a year ago, according to HousingWire’s Mortgage Rates Center. 

Reserved outlook

In contrast to the upbeat mood that mortgage professionals showed back in December when the Fed first signaled interest rate cuts for 2024, the industry doesn’t expect a meaningful impact on production volume despite the three rate cuts expected for this year.

“The latest Fed announcement confirmed that, despite likely short-term rate cuts later this year, mortgage rates will not fall enough to drive meaningfully higher origination volumes in 2024,” said Eric Orenstein, senior director at Fitch Ratings. “Eventually, mortgage loan volumes should normalize with lower rates, though there are likely several more challenging quarters ahead for mortgage companies.”

In a recent report, Fitch projected continued consolidation around the largest nonbank firms, and for the 30-year fixed mortgage rate to remain between 6.5% and 7.5% this year before declining to a range of 6% to 7% in 2025.

The “higher for longer“ theory has been echoed by Fannie Mae as the government-sponsored enterprise now expects mortgage rates to end the year at 6.4%, higher than its previously projected figure of 5.9%. This is due to strong employment numbers and hotter-than-expected inflation data. 

Regardless of when the Fed decides to slash benchmark rates, any changes in mortgage rates will likely be modest and gradual, Cook said.

“The Fed’s decision of holding rates steady while projecting three rate cuts later this year matches the consensus outlook prior to the meeting, so I would not expect any significant impact on mortgage and other lending rates,“ he said. “In short, no one should expect a return to the historically low rates we saw back in 2020 and 2021.”