Mortgage forecasts: New inflation data cements Fed tapering next week

Average mortgage rates rose to around 7% last month but have recently fallen with the markets betting yes it is Federal Reserve will cut the federal funds rate on December 18.

Two data points are key for the Fed to cut interest rates by 0.25% next week at its final policy meeting of the year: slowing inflation and a weakening labor market. While Wednesday’s consumer price index report shows inflation has picked up 2.7% November, was in line with investors’ expectations. Last week employment data showed a strong labor market, but not excessively so.

Another rate cut doesn’t mean mortgage rates will too scroll down immediately. The central bank has already cut interest rates twice this year, and mortgage rates have gone up, not down, due to continued strong economic data. Although influenced by the actions of the Fed, home loan rates they are more closely related to the movement on the bond market.

Mortgage rates it could fall further if economic data weakens and the Fed continues to cut interest rates. But that’s a big “if”.

Lately, progress has stalled in bringing inflation down to the Fed’s annual target of 2%. Meanwhile, the labor market shows no major fault lines. While the Fed wants to avoid keeping borrowing rates too high — which it could bring the economy into recession — is also wary of cutting interest rates too quickly only to see inflation reheat.

There is also the question of President-elect Donald Trump’s economic policies and whether his plans to issue large tariffs and tax cuts will fuel inflation.

According to Sam Williamsonsenior economist at First American Financial Corporation, the Fed’s decision to cut interest rates next week will not be based on future projections for the new administration. However, if the White House pursues policies that prove inflationary in the future, the Fed will consider all options in 2025, including raising interest rates, Williamson said.

That’s not good news for housing market or for potential home buyers, sidelined by a combination of rising mortgage rates, rising house prices and limited supply.

Read more: Mortgage predictions for 2025: Low rates unlikely to return under Trump

How do economic data drive mortgage rate movements?

Inflation and laboratory data they act as a barometer for the health of the economy and influence the Fed’s decision to adjust its benchmark short-term interest rate up or down. The central bank has two main goals: maintaining maximum employment and curbing inflation.

When inflation peaked in 2022, the Fed raised interest rates to reduce demand and limit price growth. The Fed turned to cutting interest rates earlier this fall as data pointed to cooling inflation and a slower labor market.

Investors in the bond market also rely on economic data to predict future Fed policy moves, and mortgage rates take direction from bond yields, he said. Melissa Cohnregional vice president of William Raveis Mortgage.

For example, bond yields and mortgage rates fell significantly ahead of the Fed’s September 18 rate cut, but rebounded quickly in response to a strong jobs report in early October.

Home loan rates they often grow quickly but fall slowly. For example, it may take several soft economic reports to send mortgage rates lower, but only one strong data to send them higher.

Read more: What the jobs data means for mortgage rates and the Fed

Are mortgage rates high because of the election?

It’s no coincidence that mortgage rates have risen significantly since the election results were confirmed early last month.

In October, markets began defensively pricing in Trump’s victory, which reversed many of the mortgage declines seen through the end of the summer.

“There is currently pressure on mortgage rates due to fears of rising debt and deficit levels and recognition that the incoming Trump administration could help grow the economy,” he said. But Wolffchief economist at Zonda, a homebuilding data company.

– Fed Chairman Powell said it’s too early to tell how Trump’s policies and the Republican-led Congress could change the central bank’s approach to adjusting interest rates.

What is the outlook for mortgage rates in 2025?

While a rate cut next week is almost guaranteed, it could only be a temporary relief.

“I expect a reduction in December and then a wait-and-see approach,” he said Greg Shergeneral director of NFM lending.

With inflation still above target and strong job growth, bond investors now expect fewer Fed rate cuts and higher long-term interest rates, which are likely to keep pressure to increase mortgage rates.

Although experts have optimistically called for rates to fall close to 6% by the end of 2024, that is less of a possibility. Fannie Mae now he expects an average 30-year fixed mortgages keep above 6.5% until the beginning of 2025.

“If the economy continues to remain on solid footing, then it’s likely that we’ll see a bit of a decline in mortgage rates,” Cohn said.

In other words, rates will only fall in 2025 if the economy weakens. This means housing affordability will not change much in the short term.

What else is happening in the real estate market?

Today’s unaffordable housing market the result of high mortgage rates, a long-term housing shortageexpensive housing prices and loss of purchasing power due to inflation.

🏠 Low inventory of apartments: A balanced housing market typically has five to six months of supply. Most markets today average about half that amount. Although we saw a surge in new construction in 2022, according to Zillowwe still have a shortfall of about 4.5 million homes.

🏠 Increased mortgage rates: At the start of 2022, mortgage rates were near historic lows of around 3%. As inflation rose and the Fed began raising interest rates to tame it, mortgage rates roughly doubled within a year. In 2024, mortgage rates are still high, effectively driving millions of potential buyers out of the housing market. That’s it caused a slowdown in home saleseven during the typically busy home buying months like spring and early summer.

🏠 Speed ​​lock effect: Since most of the house owners are locked into mortgage rates below 6%, with some as low as 2% and 3%, they are reluctant to sell their current homes because it would mean buying a new home with a significantly higher mortgage rate. Until mortgage rates fall below 6%, homeowners have little incentive to put their homes up for sale, leaving a shortage of resale inventory.

🏠 High house prices: Although demand for home purchases has been limited in recent years, home prices remain high due to a lack of inventory. The median home price in the US was $434,568 in September, up 5.1% year over year, according to Redfin.

🏠 Sharp inflation: Inflation increases the price of basic goods and services, reducing our purchasing power. It also affects mortgage rates: when inflation is high, lenders typically raise interest rates on consumer loans to offset the loss of purchasing power and ensure profits.

Expert advice for home buyers

It’s never a good idea to rush buying a house without knowing what you can afford, so establish a clear budget for buying a home. Here’s what experts recommend before buying a home:

💰 Build your credit score. Your credit score is one of the main factors lenders consider when determining whether you qualify for a mortgage and at what interest rate. Working towards a credit score of 740 or higher will help you qualify for a lower rate.

💰 Save for a bigger payment. Bigger participation will allow you to take out a smaller mortgage and get a lower interest rate from your lender. If you can afford it, a down payment of at least 20% will also eliminate the need for private mortgage insurance.

💰 Shop around mortgage lenders. Comparing loan offers from multiple mortgage lenders can help negotiate a better rate. Experts recommend getting at least two to three loan appraisals from different lenders before making a decision.

💰 Consider the equation between renting and buying. By choosing yes rent or buy a house it’s not just comparing the monthly rent to the mortgage payment. Renting offers flexibility and lower upfront costs, but buying allows you to build wealth and have more control over housing costs. The best choice depends on your finances, lifestyle and how long you plan to stay in one place.

💰 Consider mortgage points. One way to get a lower mortgage rate is to buy one mortgage points. One mortgage point equals a 0.25% reduction in your mortgage rate. Generally, each point will cost 1% of the total loan amount.

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