Orange County Register: No hope for rate relief on the horizon

According to leading housing economists, including Fannie Mae, the Mortgage Bankers Association, and the National Association of Realtors, it is predicted that mortgage rates will see a gradual decrease of at least half a percentage point by the second quarter of 2024. This positive outlook on mortgage rates comes in light of the growing economy and persistent inflation.

When the economy is experiencing strong growth and inflation remains high, interest rates tend to stay elevated. While the economy will eventually cool off and inflation will align with the Federal Reserve’s goal of 2%, these changes are not expected to take place in August. As a result, there will be limited factors compelling significant decreases in mortgage rates until these indicators shift.

It is worth noting that the potential for the Federal Reserve to raise short-term interest rates in the fall as part of their efforts to combat inflation adds further upward pressure on mortgage rates for August. This consideration factors into the overall outlook for mortgage rates in the coming month.

The Economy’s Current State

Based on preliminary estimates from the Bureau of Economic Analysis, the overall U.S. economy grew at a rate of 2.4% from April through June. This represents an acceleration in economic growth compared to the first three months of 2023. While rapid economic growth is generally viewed positively, the Federal Reserve is seeking a slowdown to effectively address inflation. Fed Chair Jerome Powell emphasized the need for “below-trend growth and some softening of labor conditions” at a news conference held on July 26 after the Fed’s recent quarter-point rate increase.

As the economy continues to display renewed strength, the inflation rate remains volatile and lacks a clear direction. While the core PCE price index (the Fed’s preferred measurement of inflation) stayed within the range of 4.6% to 4.7% from December to May, it dropped to 4.1% in June. However, it is uncertain whether this decrease is a one-time occurrence. The Federal Reserve officials will await a sustained decrease in the inflation rate before confirming the effectiveness of their rate hikes.

Fed Chair Powell acknowledged that while inflation has moderated since mid-2022, there is still a long way to go to bring it down to the target of 2%. This statement suggests that lower mortgage rates should not be expected in August.

Expert Outlook

Housing economists from various organizations have expressed a similar sentiment regarding mortgage rates for the rest of this year. Fannie Mae’s chief economist, Doug Duncan, expects rates to remain elevated due to the resistance in falling inflation. Freddie Mac’s July Housing and Mortgage Market Outlook also predicts a slow easing of inflation without a significant reduction in long-term rates, including mortgage rates. The National Association of Realtors, however, offers a more optimistic view in their updated economic forecast. Lawrence Yun, NAR’s chief economist, believes that mortgage rates have reached their peak with consumer price inflation stabilizing. He suggests that a meaningful decline in mortgage rates would prompt a surge in homebuyer activity.