The Federal Reserve’s Report to Congress and Its Implications for the Housing Market
The latest Federal Reserve report to Congress in July 2024 offers critical insights into the immediate future of the housing market. Despite some stabilization in mortgage rates, which remain around 7%, the high rates continue to affect home affordability and overall market activity. Interest rates will likely remain elevated, but a small reduction is possible by the end of the year: With a larger reduction likely by the end of 2025 or early in 2026.
Key Highlights from the Fed Report
Inflation and Monetary Policy
The Fed remains committed to bringing inflation down to its 2% target. Although inflation has moderated somewhat, it still exceeds the target, prompting the Fed to maintain higher interest rates. The federal funds rate is expected to stay elevated with a small and far from certain cut coming in September. The futures market suggests a 48.3% chance of a 0.25% cut in the Federal Funds Rate in September. (A brief intro to deriving implied probabilities from futures)
Impact on Mortgage Rates
The report highlights that yields on long-term U.S. Treasury securities, which heavily influence mortgage rates, have fluctuated significantly. This volatility and elevated spreads on mortgage-backed securities (MBS) have kept mortgage rates high. While the MBS spread has decreased slightly, it remains higher than pre-pandemic levels due to ongoing interest rate volatility (Home).
Housing Market Dynamics
Sales of existing and new homes have dropped, and while inventory levels have increased, the higher borrowing costs have deterred potential buyers. The National Association of Realtors (NAR) reported that the annual sales rate for existing homes decreased by 1.9% from March to April 2024, while new home sales fell by 4.7% during the same period (HousingWire).
Economic Projections
The Fed’s economic projections also suggest a possible decline in mortgage rates by the end of 2024. Both market-based measures and survey responses indicate a reduction in the federal funds rate, reinforcing the picture presented by the futures market. Nevertheless, these rates are not expected to fall below 6% for the foreseeable future, maintaining a challenging environment for home affordability (Home).
Outlook for the Housing Market
The high mortgage rates have had a dual impact on the housing market. They have made homes less affordable for potential buyers and discouraged current homeowners from selling due to their lower existing mortgage rates. This situation has kept inventories tight and prices high. If the Fed manages to control inflation and stabilize interest rates, the situation in the housing market will improve. However, as Powell’s remarks make clear, permanent inflation will also raise mortgage rates, so the inflation fight must take priority. It is better to suffer high mortgage rates now than it is to allow inflation to raise them long-term and exacerbate the affordability crisis further.
Conclusion
The latest Fed report underscores the delicate balance the central bank must maintain between controlling inflation and supporting economic growth. The housing market continues to feel the effects of high mortgage rates, but there is cautious optimism for improvement in late 2024 or early 2025 if inflationary pressures ease and interest rates stabilize. For more detailed information, you can refer to the full Monetary Policy Report (Home).
Franklin Carroll
Franklin Carroll is Kukun's VP of Modelling and Analytics; After finishing his studies at the University of Chicago, he worked at Fannie Mae where he helped build Collateral Underwriter, roll out the Value Verify initiative, and specialized in collateral related and credit related policy.
Published July 16, 2024
