Last year the Fed came out and stated that they wanted to keep rates ‘higher for longer’. The fed’s fear was, and still is, that lowering interest rates too soon could overheat the economy and lead to more damaging inflation. This was after raising their benchmark lending rate 11 times in a year and a half to 5.25-5.5%. The country hadn’t seen such dramatic increases since the 1980’s. Why so far, so fast? In the first quarter of 2022 the rates were near zero to stimulate the economy as we emerged from the pandemic. Mortgage interest rates in turn came down to the historically low range of 3% +/-. In retrospect the rates were too low for too long, and ended up inflicting (hopefully only) short term inflationary damage.
This past week the CPI and PPI numbers came out, and they were hotter than expected. This is concerning, as Wall Street had been hoping for a multitude of rate cuts this year, which would have begun next month. Only as recently as December of last year investors were betting on 6 rates cuts in 2024, even while the Fed was signaling only 3 rate cuts. Investors have been getting more real lately and actually listening to the Fed, tempering their expectations back to fewer cuts, later in the year.
What does this all mean for the housing market? Spring is still coming, but the mortgage interest rates don’t look as low as we had all hoped, which should mute demand somewhat. Rates have been rising instead of falling, with average 30 year fixed rates hitting 7.25% this week. When we talk to mortgage brokers these days, they are still quoting rates in the mid 6’s, but that’s for buyers with the best credit using points to buy down the rate.
Housing inventories remain low, and the percentage of homes in escrow in Marin still strongly favors sellers. This spring we should see an uptick in demand and supply as we do every year. If the CPI and PPI numbers start cooperating again and resume their descent, the Fed will begin a rate cut cycle that will in turn bring down mortgage interest rates and increase demand for homes in the summer and fall, which is typically when we can use an increase in buying activity. We are still projecting a good sellers market in 2024, it just might not be as good or come as quickly as we had hoped.