I’ve said it numerous times: the Fed Funds Rate does not directly correlate with the 30-year fixed mortgage rate. Every time the Fed makes a move, it hits the news, and my phone starts ringing off the hook with potential borrowers expecting mortgage rates to drop. However, mortgage rates have already fallen, from 8% in October 2023 to 6% recently.
The Fed rate drop primarily impacts consumer rates like credit cards, car loans, and short-term loans, such as HELOCs based on adjustable rates. What’s ironic is that long-term rates, like those for 10-year bonds and 30-year mortgage securities, have actually ticked up slightly. This isn’t unusual, as the market often prices in anticipated rate changes before they occur.
The Fed Funds Rate has been at 5.33% since its last adjustment on August 21, 2023. Now, after a year, it has been adjusted down by 0.5% to 4.78%. During the press conference, Fed Chair Powell expressed confidence that it’s now time to “recalibrate” their position. The economy remains strong overall, inflation has decreased from 7% to 2.2%, and employment levels are stabilizing.
The key question now is the pace of future cuts. The Fed will continue to monitor economic reports closely, with labor market weakness being a critical factor. It’s interesting to note that Powell acknowledged that employment statistics have been artificially high and required major revisions. The U.S. Bureau of Labor Statistics recently revised its employment estimate downward by 818,000 jobs, showing fewer gains than originally reported between April 2023 and March 2024.
The Fed’s dot plot predicts an additional 0.5%–0.75% reduction in 2024, with Fed rates expected to drop to 3.4% in 2025 and reach the terminal rate of 2.9% in 2026. Of course, many variables could influence this trajectory.
The spread between the 10-year note and the 30-year mortgage rate has been shrinking. This spread reflects the perceived risk of a mortgage relative to the safety and return of a U.S. 10-year note. Currently, the spread is 2.36%, down from around 3% a year ago. The typical spread is about 1.75%. Mortgage risk generally includes the possibility of foreclosure or government regulation issues. When rates were high a year ago, mortgage security investors faced an additional risk: early refinance payoff. Due to the costs of origination, government paperwork, and compliance, if a loan isn’t held for at least three years, it can result in a negative return. As rates have dropped, so has the risk of early refinance.
Powell acknowledged that the housing market is somewhat “locked up” due to the low rates many existing homeowners enjoy, and there’s little the Fed can do about the lack of adequate new construction and inventory. He believes that as rates normalize, the real estate market will follow suit.
Although mortgage rates may dip into the 5% range over time, property values could continue to rise, offsetting some of the increased affordability.
It was conveyed by a few clients that they think the Fed move was politically motivated. My take is Powell has been chair since 2018, over 4 elections. The Republicans would prefer no drop before the election, the Democrats wanted a larger drop long ago. If neither side is happy, he’s probably doing a decent non-partisan job. The Federal Reserve must stay independent. Having either party in control of it would be a huge mistake.
If you are in the Los Angeles area, and have any questions or real estate sales or financing needs, feel free to contact me
Ron Henderson GRI, SRES, SFR, RECS, CIAS, CREN, GREEN
President/Broker
Multi Real Estate Services, Inc.
Gov’t Affairs Chair – California Association of Mortgage Professionals (2017-2018)
Chairman – OutWest Marketing Meeting (Real Estate Education)
BRE #00905793 NMLS #310358
www.mres.com
ronh@mres.com
Specialist in the Art of Real Estate Sales and Finance
Real Estate market, mortgage rates, Los Angeles, San Fernando Valley, Conejo Valley, Simi Valley, Woodland Hills, West Hills, Calabasas, Chatsworth
Leave a Reply