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January 12, 2024
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January 12, 2024
The Odds Are in Favor of Lower Rates!
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This week was a first look at inflation data for December. The Consumer Price Index (CPI) came out a little bit above expectations but still trending in the right direction.
The core CPI, which the Fed is most interested in because it strips out the volatile food and energy sector, actually came in with a 3 handle. What does that mean? It came in at 3.9%. It just feels better to be in the 3s than the 4s knowing we're trending to the Fed's 2% target.
If you look at the last 6 months, core CPI figures and annualize it, this is now almost right at the Fed's 2% target.
Combined with the good CPI data was the Producer Price Index (PPI) that came out today. This measures wholesale inflation. Wholesale prices can be a precursor to a drop in retail prices. Year-over-year core PPI figures actually dipped below 2% to 1.8%. Hopefully, this will translate to a continued lowering of the CPI.
With inflation dropping, the Fed is now looking at lowering the federal funds rate sometime this year. They're trying hard not to put the economy into a recession, so they may be letting off the gas pedal just a little bit.
In the last two years, the Fed has raised the federal funds rate 11 times to their current level of 5.25% to 5.5%.
Now, let's look at the odds of a rate cut in 2024. Wall Street traders are always trying to anticipate the direction of the market. Here are the current odds:
At the Fed's meeting on March 20th, the odds are 68% chance the Fed will cut rates. Their next meeting is May 1st, coming in at a 94% chance of a rate cut. Then on June 12th, the odds stand at 100% chance of a rate cut by the Fed, and that remains throughout the entire year. 100% for the last 4 Fed meetings.
In other words, odds are very good that rates will drop this year, and it's anticipated that there will be at least 0.75% rate cuts to the Fed funds rate this year.
The question is how will this translate to mortgage rates? Mortgage rates should follow suit.
Right now, the 30-year fixed rate conventional mortgage is fluctuating around 6.75%, according to the Mortgage News Daily Rate Index. If mortgage rates follow the same pattern, a 0.75% reduction would bring mortgage rates down to around 6% this year.
Remember, the federal funds rate is fixed by the Fed. It is not a volatile indicator. Mortgage rates are market driven and react to what the Fed does. The direction of mortgage rates doesn't always go in the same direction of the federal funds rate.
In the news, the 30-year conventional mortgage rate is the "baseline" rate used for comparison. However, we're seeing a lot more FHA buyers. FHA mortgage rates have been trending about a 0.5% below conventional loans, sitting at around 6.1% according to Mortgage News Daily.
If the same logic comes into play and mortgage rates drop 0.75%, that would put FHA rates in the mid-5s, helping with affordability.
FHA has become a super popular loan program because of the lower rates and the fact that monthly mortgage insurance was decreased by 0.3% last May. That makes a huge difference!
Make sure your clients aware of this! They might be able to afford a little bit more than they think!
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Estimated Qualifying Income assumes a homebuyer has a FICO score above 740, no other credit debt, and a debt-to-income (DTI) ratio of 43%.
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