By Gay Cororaton, MIAMI REALTORS Chief Economist
What a terrific year-ender for interest rates, with a dark cloud lifted over where interest rates are heading in 2024.
At its December 12-13 meeting, the Fed’s Federal Open Market Committee outlook indicated three rate cuts in 2024, with a cumulative reduction in the federal funds rate by 0.75%. This reduction reduces the federal funds rate to 4.6% from the current range of 5.25% to 5.5%.
With the expected 0.75% cumulative reduction in 2024, the 30-year fixed mortgage rate could hit 5.25% by year end, averaging 6% for the full year .
The decline in mortgage rates can bolster home sales by 7%, based on how home sales have reacted to the mortgage rate increases in the past two years.
Fed December 2023 Economic Outlook Indicates Three Rate Cuts with a Cumulative Reduction of 0.75% in 2024
In its September meeting, the Fed participants outlook called for a smaller rate cut of 0.25%. The more aggressive rate hike schedule indicates that the Fed participants think that the inflation target of 2% can be achieved without raising rates further as the past rate increases continue to have the intended effect of slowing inflation. As of November 2023, inflation was down to 3.1% from 9.1% in June 2022.
Financial markets welcomed the expected rate cuts with euphoria. The 30-year fixed mortgage rate during the week of December 14 fell to 6.95%, the first time since August the rate fell below 7%.
30-Year Mortgage Rates Could Fall to 5.25% by 2024 Q4
Prior to the Fed’s expected 0.75% reduction, I had expected the 30-year fixed mortgage rate to hit 5.75% by the end of 2024. With the expected 0.75% cumulative reduction in 2024, the 30-year fixed mortgage rate could hit 5.25% by year end, averaging 6% for the full year .
Here is why:
The Fed’s 2024 anticipated rate hikes were immediately priced in by the financial market. As of December 14 , the 10-year Treasury Note rate, a benchmark for the 30-year rate, fell to 3.9% from 4.2% the day prior, indicating that the bond market priced in at least one rate reduction.
By the end of 2024, the 10-year Treasury Note could fall to 3.4%, pricing in the additional two rate reductions of 0.5%. Given the historical spread of 1.7% between the 30-year fixed mortgage rate and the 10-year Note from 2018-2019, the 30-year fixed rate mortgage is likely to hover at 5.25% by 2024 Q4.
Lower Mortgage Rates to Boost Sales by 7%
The decline in mortgage rates can bolster home sales by 7%, based on how home sales have reacted to the mortgage rate increases in the past two years.
In the 2021-2023 housing downturn, existing home sales fell 33% nationally (2023 annual rate of 4.1 million vs 6.1 million in 2021) as the 30 -year fixed mortgage rate increased by 3.85 percentage points (2.96% in 2021 to 6.81% in 2023), or a 9% decrease for every one percentage point increase in mortgage rates.
In the Southeast Florida counties of Miami-Dade, Broward, Palm Beach, Martin, and St. Lucie, total home sales from January-October 2023 also fell at about the same rate, at 32% (109,666 Jan-Oct 2021 vs. 74,587 in Jan-Oct 2023).
So, a reduction in the mortgage rates from an average of 6.81% to 6% can bolster home sales by about 7% (0.81 percentage points x 9%=7.3%).
