After almost two years of steep mortgage rates, homebuyers are still waiting for the pot of gold at the end of the rainbow. Except it’s hard to find a rainbow in today’s gray housing market.
While the Federal Reserve promised lower interest rates at the end of 2024, the journey there is proving to be bumpy. During the March meeting of the Federal Open Market Committee (PDF), the Fed voted to once again leave its benchmark short-term interest rate, the federal funds rate, unchanged at a range of between 5.25% and 5.5%. Since inflation has barely budged and the labor market appears strong, investors and economists are pushing back the timeline for future interest rate cuts.
Back in January, Fed Chair Jerome Powell noted in a press conference (PDF) that the Fed is not aiming to ease home price inflation, but acknowledged that high housing costs are affecting people’s lives. “When we cut rates at the beginning of the pandemic, the housing industry was helped more than any other industry. And when we raise rates, the housing industry can be hurt,” said Powell.
The Fed doesn’t directly set mortgage rates, but its decisions influence different credit markets. When the benchmark rate is adjusted up or down, mortgage rates tend to move in tandem, which has a broader impact on the housing market. Mortgage rates also move preemptively, responding to the market’s mere anticipation of rate hikes or rate cuts.
Most experts expect the Fed will start lowering interest rates later this summer and that mortgage rates will inch closer to 6% by the end of the year. But predictions change regularly in response to economic data, geopolitical events and more. If inflation doesn’t improve, the Fed could keep pushing off rate cuts.
If you’re in the market to buy a home this year, here’s what experts say about the latest Fed decision and what it means for mortgage rates this year.
What is the Fed’s next move?
When the Fed implemented an aggressive rate-hike policy strategy starting in 2022 to tame inflation, it made it more expensive for banks and corporations to borrow money. Lenders responded by increasing rates on consumer debt products, such as mortgages, credit cards, home equity loans and home equity lines of credit, or HELOCs. The idea is that by increasing the cost of credit, demand will weaken and prices will eventually fall.
Inflation has cooled significantly, but it hasn’t yet reached the Fed’s 2% annual target rate. The most recent Consumer Price Index shows annual inflation at 3.2%, while the Personal Consumer Expenditure report (the Fed’s preferred price index) is measured at 2.4% (PDF) year over year.
Changes in monetary policy can take months to trickle through the system. By holding steady, the Fed is evaluating how its series of rate hikes are affecting the economy.
“How the market interprets incoming inflation, economic and labor data will impact how mortgage rates respond,” said Odeta Kushi, deputy chief economist at First American Financial Corporation. If inflation continues to decelerate, the economy slows and the labor market cools, that can help mortgage rates become more affordable.
But even if the Fed starts cutting rates later in the year, it will likely be a slow and gradual process, said Alex Thomas, senior research analyst at John Burns Research and Consulting. “The Fed wants to avoid a scenario in which they cut too much or too quickly and have to reverse course,” he said.
Moody’s Analytics expects mortgage rates to average between 6% and 6.5% over the next two years, according to housing economist Matthew Walsh.
When will the Fed cut interest rates?
After this month’s meeting, the Fed has six more policy gatherings in 2024: April 30-May 1; June 11-12; July 30-31; Sept. 17-18; Nov. 6-7 and Dec. 17-18. Here’s when we might see the first interest rate cut.
What experts are saying
“I believe the first rate cut will be in July or September, right before the general election. I don’t think seeing 2% inflation is critical to start cutting rates; more important is seeing a sustained downward trajectory over a series of months.”
- Erin Sykes, chief economist at NestSeekers International
“The resiliency of the US economy and labor market has policymakers in no rush to cut rates. The Fed is looking for further assurance that inflation is headed sustainably towards their 2% target, so it’s possible we won’t see rate cuts until this summer.”
- Odeta Kushi, deputy chief economist at First American Financial Corporation
“The FOMC will need to see additional evidence that inflation is moderating, and the labor market is slowing to build a case for the onset of rate cuts later this year. Our March baseline forecast puts the first rate cut in June, which is a meeting later than we expected last month.”
- Matthew Walsh, housing economist at Moody’s Analytics
“While the 2% inflation is still the Fed’s target, Fed Chair Powell suggested in the December meeting that cuts may start before reaching the target but given complete confidence that inflation numbers are moving in that direction. We may see the first cut later this summer, possibly July.”
- Selma Hepp, chief economist at CoreLogic
“The recent economic data we’ve seen suggests that the Federal Reserve likely will hold off on cutting rates until the summer…While rate cuts are still on their way, the Fed wants to see more data before making the first move.”
- Lisa Sturtevant, chief economist at Bright MLS
What does the Fed’s March meeting mean for homebuyers?
Homebuyers have felt the pain of higher interest rates over the past two years. While mortgage rates are slated to slowly come down over the coming months, it won’t be a return to the 2-3% mortgage rates we saw between 2020 and early 2022. But that doesn’t mean you can’t get a lower mortgage rate (potentially lower than the average).
Boost your credit score: Having a credit score of 700 or higher not only increases your chances of getting approved for a loan, it likely will help bring down your interest rate. Lowering your credit utilization ratio and paying your credit card bills in full and on time can help improve your credit.
Consider buying mortgage points: Also known as discount points, mortgage points are fees you pay the lender upfront in exchange for a lower interest rate. One mortgage or discount point is typically equivalent to a 0.25% decrease in your mortgage rate. Buying down your rate with discount points can save you money in the long term. But if you’re going to sell or refinance before the full loan term is up, paying more fees upfront may not make sense.
Shop around for mortgage lenders: Based on factors such as your credit score, debt-to-income ratio and down payment, a lender can estimate your interest rate, monthly mortgage payment and closing costs. Experts recommend getting at least three loan estimates from different lenders so you can get an equal comparison.
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