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Mortgage Rates: The Fed, Inflation, & What to Expect

inflation interest rates mortgage rates the fed May 20, 2024

Whew! It's been a whirlwind of a past couple weeks.

I just finished presenting my in-depth quarterly update on our local markets to my coaching clients and a few other amazing groups.

Here's the main question everyone was asking ahead of the update: when will rates come down? πŸ€”

It makes sense that buyers, sellers, and real estate professionals would be focused on this hot topic.

So many people feel like lower rates will solve all our problems.

The main challenge we face is much of the inflation data suggests prices are still rising much faster than the Fed wants (2% a year). That will keep the brakes on rates coming down.

βœ… Realtors: if you can get a good overview on this topic, you'll give higher quality advice to help your clients make better decisions.

Let's take a closer look..


When will interest rates drop?

It's reasonable to conclude that interest rates are remaining higher than most people expected because the Fed has not lowered the Federal Funds Rate.

⚠️ The Fed is keeping rates higher for two main reasons: 1) because inflation is still above their target level and 2) our job market has remained stronger-than-expected.

Also, it's important to note that interest rates tend to move up and down based on what the market expects the Fed to do.

For example, mortgage rates went from 7.85% in October 2023 to 6.62% in December 2023 based on new expectations that the Fed would cut rates in 2024. πŸ“‰

Since then, the Fed has walked back their plan to cut rates after getting higher-than-expected inflation reports. Because of that, rates have come back up to 7.00%. πŸ“ˆ

The main point is that the Fed never actually changed rates - they just talked about the future and it was enough to move markets.

Now, if we want to get an idea of when rates could come down, we need to watch the data on inflation. πŸ‘€

Higher inflation will force the Fed to keep rates high unless we start to see our economy really slow down. The opposite is true as well.


What's the latest on inflation?

There's a variety of ways to measure how prices are changing.

In fact, we got 8 new data points related to inflation this past week. πŸ“Š

Historically the Consumer Price Index (CPI) carries a lot of weight.

The main challenge with the CPI is the numbers are massaged and adjusted. The end result isn't necessarily an accurate picture of reality (here's a good read for more on the topic).

Because of this, I try and take a broad view at what all the numbers are saying.

Here's a quick overview on each report:

  • 🏭 Producer Price Index (PPI): shows how much prices are changing for things made by companies before they are sold in stores. In theory, if this goes up, companies will charge us more for things.

  • πŸ›’ Consumer Price Index (CPI): measures how much prices are changing for things we buy every day, like shelter, food, and clothing. 

  • πŸ“¦ Import Prices: tracks how much it costs to buy things from other countries. We import so much that this directly relates to a lot of the things we buy. Also, there are very few adjustments to these numbers and they may be the most realistic measure of current price changes.

  • 🚒 Export Prices: tells us how much money we get for selling things to other countries. This reflects cost increases to other countries and could indicate if our manufacturing costs are going up.

They also strip out various things to look at the numbers a few different ways.

Core means they've removed energy and food from the equation. Ex-ag means they've removed agriculture exports from the measure.

They do this because events outside their control (weather, war, etc.) can impact energy and food costs in theory.


Finding Opportunity

Let's start by mentioning that everyone celebrated the CPI update and rates fell a bit.

We'll take it! πŸ‘

However, I'd caution us all to manage our expectations.

It can be easy to jump to conclusions that inflation is over and rates are coming down because we want that to be true. 

While the CPI update met expectations and I'm hopeful inflation will keep declining, reality looks like that is wishful thinking, πŸ™

For reference, we need these monthly changes to be around 1.5% for a full 12 months in a row to hit the goal of 2% inflation. 

Instead, we're at least double that which isn't a good sign. 😰

If we look at all these measures over time, most appear to have bottomed and are now increasing. This indicates trouble ahead for interest rates.

How do we use this? We give our clients the truth.

The numbers are telling us that inflation isn't likely going away.

We shouldn't expect continually declining rates like we've experienced over the last 40 years.

This doesn't mean all is lost. πŸ˜…

We can still see times where opportunities arise and rates fall a percent or two. Just don't expect it to last for long (unless our economy really tanks)..

One look at the start of 2024 serves as a good example of this.

πŸ’‘ My advice: buyers and sellers should get clear on their goals and look at how they can work to accomplish them today rather than waiting for the "perfect time."

If rates drop, take it and run. Otherwise, work with your lender and real estate agent to learn how deals are getting structured to help maximize value for buyers and sellers.

We might see the Fed cut rates and enjoy the benefits, but higher inflation will almost certainly follow and we'll be right back where we were before.

Additionally, if rates fall meaningfully, it's going to be a frenzy as buyers and sellers race to get a house while rates are relatively low.

No matter what happens, there are always opportunities! Keep the focus on your clients' goals and you'll be just fine. πŸš€

Dr. Alex Stewart


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