Prediction: The Fed Will Cut Rates in 2024, But Not Enough

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We know that the week of September 16 is going to be pretty interesting. Not just because estimated quarterly taxes are due, but because of the Federal Reserve board meeting to decide if it's going to cut the federal funds rate, and what happens after that.

I'm nearly positive that this will happen this month. I'm also following experts who think the Federal Reserve will do it again in November. But I am not convinced that the corresponding response by mortgage rates will be enough to really change anything for the housing market.

Let me explain why.

Limited existing home listings are driving prices

This isn't a thunderbolt revelation by any means, but it bears repeating: Existing home prices are being driven by a lack of housing inventory. As of July 2024, the National Association of Realtors reported there was an estimated 3.6 months of supply available. This has largely remained steady for the last year, with July 2023 having three months -- not a significant change when a balanced market is considered to be achieved at six months of supply.

Days on market remain really low, even for more expensive homes, which generally take longer to sell. In July 2024, million-dollar houses sold in 18 days. Starter homes priced between $100K and $250K sold in 15 days. The only group that took longer than 20 days was the under $100K set, which tend to either be located in rural areas with limited buying pools or are investment homes in need of significant repair.

These two factors taken together, coupled with a median sales price over $400K, point to the market still being just as desperate as it was last year, even if it's not still making the news every day.

Existing homes are limited by reluctance to sell

Another perhaps unoriginal conclusion here, but it's necessary to include it in this argument. People like me with 3% mortgages aren't selling our homes. We just aren't. Would you, unless you absolutely had to? We not only have amazing rates, but we're trapped in our mortgages because selling our homes to buy new ones at today's prices (even with all our equity) doesn't get us ahead.

Let's do the math. Let's say you bought your home in April 2020 using a 3.15% mortgage. In Q2 2020, the median home price was $317,100. Today, the average mortgage interest rate is 6.46%, and as of Q2 2024 (the latest data), the median home price is $412,300.

If you put 10% down when you bought, your monthly principal and interest payment on the April 2020 loan is $1,226.43, and as of September 2024, you'd still owe $258,835 on your loan. We know it costs between 6% and 10% of your home's sales price in fees at closing to sell your home. So we can assume your original down payment is eaten up in fees. That still leaves you $58,265 to put down on your next house, which costs $412,300.

You now have to borrow $354,035 to just buy the same house you sold -- we're not even talking about upgrading anything. At 6.46%, that monthly payment is now $2,228.44. You made no forward movement on the property ladder and still have to pay an extra $1,000 for the pleasure of hiring movers. No wonder people aren't selling.

According to Freddie Mac data, as of January 2024, 62% of mortgages have rates below 4%. Here's something even more mind-boggling: 29% of mortgages have a sub-3% interest rate.

What will it take for housing inventory to rebound?

What would it take to move the needle? Where does that magic number have to be? Economists smarter than me think it's a sub-6% rate, but I'm not sure that's enough. Let's just look at our example above again.

If your mortgage lender offered you a 5.5% rate in the same situation, your payment would still be $2,010.17. Maybe that's low enough for some people to bite at. But for most? Not unless they become very desperate for change very soon.

We're not only having to compensate for higher interest rates but also for higher closing fees, higher insurance rates, higher everything associated with housing. Even at 4.0%, you're still going to be going into that vertical movement home for $1,690.22 per month.

What it's going to take for housing inventory to rebound is a lot of people without mortgages selling their homes, whether that's from an inheritance (I'm sorry for your loss) or because they've paid their homes off and want to downsize.

So, although a lower rate will help home buyers who are able to compete today, it's not going to change the fundamentals that have left the market stuck like it is. People like me are not selling our homes. We can't. These golden handcuffs chafe sometimes, but at least it's a roof over our heads.

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