October 18, 2024
Preface
Mortgage rates have seen plenty of volatility this year as investors try to discern the underlying trends for inflation, economic growth and Fed policy. Fortunately, the volatility since May has been to the benefit of potential mortgage seekers, as rates hit multi-year lows in late September. You can excuse folks for feeling a little queasy regarding mortgage rates this year, as 30-year fixed rates ran from the mid-sixes up to the low-mid sevens and then back down to the low sixes, all in the stretch of about eight months or so.
Now that the speculation about "if the Fed will make the first move in policy and how much it will be?" has been laid to rest, it may just be that we'll see somewhat less volatility for a while. The forward path for Fed policy is now pretty clear, in that lower rates will be coming over time, leaving the only unknown the size and cadence of rate cuts to come. At least based on the Fed's recent shift in focus, what happens to monetary policy in the near term will be dictated primarily by what's happening with labor conditions, and to a lesser extent whether or not inflation continues to drift toward the central bank's 2% core PCE target. If labor conditions should deteriorate, more rapid or more sizable rate cuts may come; conversely, if labor conditions remain solid but inflation remains stubborn (or only gradually settling), smaller and less frequent cuts are more likely. In this regard, it's worth considering that energy and goods costs are unlikely to decline indefinitely.
That's not to say there is any predetermined path for Fed policy or mortgage rates, or that there aren't any number of things both here in the U.S. and across the globe that will have no influence on them; there are, and they will. Spreading war in the middle east, Ukraine and Russia's ongoing conflict, China's issues and ambitions and plenty of other wildcards are in play at the moment. In addition, the U.S. has consequential elections coming up shortly which may change the picture of all of these items in material ways, for both worse and better.
Add to this what appears to be a period of greater sensitivity than usual among investors than normal. For whatever reason, markets have been a little twitchy of late, with investors rushing into (then out of) bonds and into stocks and vice versa as ebullience gives way to doom and gloom and back again. Not that it's ever easy or simple, suffice it to say that it's a complicated time to be forecasting interest rates.
Recap
We saw a little of this kind of bipolar market activity during the last forecast period. Some then-soggy data and comments from Fed Chair Powell in late August signaled that the Fed was ready to begin a new cycle for policy. After that, investors moved from a position of "maybe rate cuts starting in September" to "large rate cuts in September and beyond" back to "possibly few or even no cuts as the year comes to a close," a whipsaw in position over a relatively short period of time.
Thirty year mortgage rates were moving down into our expected range early in the forecast period, then dropped below expected bottoms as "50 basis point fever" took hold, before returning to levels close to our expectations at the end of the period. We expected conforming 30-year FRMs to run in a range of 6.35% to 6.75%, where they actually managed a 6.08% - 6.46% gap over the nine-week period. Overall, and in general, we expected rates to be higher than they were and so missed the mark for over two-thirds of the forecast period.
Initial fixed interest rates for 5/1 ARMs also suffered from temporary expectations for larger rate cuts coming soon, breaking below our expected bottom for a couple of weeks in the middle of the nine-week forecast period. Back in August, we called for a 5.85% and 6.25% pair of boundaries, and ended up with a low mark of 5.66% and 6.25% at the top end.
Few ARMs are being originated at present, and given only a small discount in rates compared to a 30-year FRM, even fewer will probably be originated this fall. Overall, our forecast for the period just closed could be considered "fair", as it was about 80% accurate.
Forecast Discussion
It's an open question, but one that bears pondering: Between now and the end of 2024, what issue holds the greatest sway over financial markets? It is the election and its aftermath? The pair of Fed meetings in November and December? Inflation's trajectory over this time... or labor conditions, seemingly both not as strong as was thought and stronger than expected at the same time?
Perhaps it's global events that are of greater concern, including China's attempts at stimulating its sluggish economy or escalating military conflicts. As it's hard to factor for investor reactions to these kinds of processes or events, we simply have to accept that there are any number of unknowable factors that may affect interest rates in the coming months.
The elections will certainly have at least some influence, as both major candidates have made all manner of expensive promises, not that there's any reason to think that some/many/all of them would be enacted even if one or the other is elected. Rather, it seems more of a continuation of the policies and priorities of the last four years or a refutation of them in favor of something more akin to what existed in the four years prior. The country seems pretty divided as to which is better or worse, and it's unlikely that there will be more unity or comity regardless of the outcome.
The labor markets will be the primary driver of Fed policy this fall. It's not as though inflation doesn't matter, but enough progress has been made in damping price pressures that the Fed can feel comfortable in adding a little more support to economic growth (and in turn, the job market). Labor conditions remain solid, with the economy near what is considered to be "full employment", but investors don't yet seem to have adapted to what is likely to be a pattern of more modest hiring. They should, since employment conditions appear to be settling back to about where they were at the end of the last recovery, where sub-200,000 monthly hiring figures were quite common.
The trend for inflation has been mostly favorable, if not retreating in an orderly fashion or at a speed that has been expected. At least through the last couple of months, there appears to be a flattening out in the downtrend for inflation, if not a bit up of an uptick. By way of example, core CPI managed to ease to an 3.2% annual rate by July, held there in August, and then edged up to a 3.3% clip for September. Core PCE (the Fed's preferred inflation gauge) shows a similar pattern starting a month earlier, with annual core PCE sliding to 2.6% in June, holding there in July and ticking 0.1% higher to 2.7% in August. If it follows core CPI, a steady reading or a tick higher in core PCE may come for September. If core inflation isn't fading toward 2%, the Fed will feel justified in waiting to lower rates, even if more modest monthly hiring figures should disappoint investors.
The Fed's half-point cut in September may have been a catch-up move, given large downward revisions to hiring over the April 2023-March 2024 period and what at the time appeared to be rather softer labor conditions over the summer. Thinking differently, it may be that the half-point cut was preemptive rather then reactive, in that making a large move in September removes the need to make any move in November at all.
Given upward revisions to hiring, a continued retreat in the unemployment rate and the prospects of inflation not continuing to decline, a no-move November may actually turn out to be the case. The September JOLTS data, weekly initial claims, quarterly Employment Cost Index, September PCE data and the October Employment Situation all come out the week before the Fed meeting, and these will dictate whether the Fed makes a move in November or not. All this said, there's still a good likelihood of a quarter-point move by the Fed in November, but no move at all wouldn't surprise us.
Forecast
Coming around, what does it all mean for mortgage rates? Investors have at least partially (if not wholly) recalibrated their expectations for Fed policy to close 2024. As is often the case, mortgage rates typically rise and fall more than economic conditions warrant, and that seems to have been the case on the downside during the last forecast period. Unless there is some truly weak labor market data (or less likely, that there's a sudden plummet for inflation) mortgage rates probably won't return to recent bottoms, even as they don't appear to have much reason to run much higher right now, either.
Volatility to the downside for rates would come from a deterioration in labor conditions that puts large cuts by the Fed back on the table. Volatility to the upside comes from stable labor conditions and/or firming for inflation that increases the chances that the Fed holds rates pat, at least for one meeting.
It's probably folly on our part to think so, but it does seem as though we could be headed into a relatively flat period for mortgage rates, at least based on the economic and inflation fundamentals, external wildcard issues notwithstanding. Recent bottoms for rates are probably as low as they can possibly go over the next nine weeks, give or take a little. Conversely, it's unlikely that there will be a seismic shift that powers them much higher than they are at the moment, either.
With this in mind, we think that the average offered rate for a conforming 30-year fixed-rate mortgage as reported by Freddie Mac will likely hold in a range between 5.98% and 6.43% between now and mid-December. As far as the average offered initial rate for a 5-year hybrid ARM, it seems likely that a 5.75% to 6.25% pair of fences will contain the rate on the most popular alternative to the traditional 30-year FRM, even if it's not all that popular at present.
This forecast expires on December 19, 2024. It'll be full-on holiday season at that point, a busy time for all. As you finish your preparations, stop back and see if this forecast deserves a gift... or perhaps a lump of coal.
Between now and then, interim forecast updates and market commentary can be seen in our weekly MarketTrends newsletter. You can sign up to get MarketTrends by email, too.