Rates Finally Easing: Is Now the Time to Buy?

As we embark on 2024, we continue to expect a soft landing for the U.S. economy and a gradual easing in mortgage rates. The Federal Reserve has kept their benchmark Fed Funds rate steady since late last July. Experts think the Fed will hold steady once again in March and continue to monitor inflation data.

The May Fed meeting is the one to really watch. Why? The Fed has to decide when to stop shrinking its balance sheet, which had ballooned by nearly $3 trillion during the pandemic as money was pumped into the economy, in part by buying up mortgage-backed securities, driving rates to record lows.

In 2023, as the Fed has shrunk that balance sheet, rates have risen. The Fed's balance sheet is almost back to pre-pandemic levels, so the Fed has to decide when to slow down the unwinding process, which should have a downward effect on rates. The strength of the economy this Spring will also play a role.

Meanwhile as abnormally large spreads between the 30-year fixed rate mortgage and the yield on 10-year Treasury bonds continue to narrow towards historical levels, mortgage rates have eased. It’s not exactly a plunge, but rates in the 6.5% range, down from around 8% last October, have already had a welcome effect on affordability.

Redfin reports that a budget that would have afforded a $416,000 home will now buy a $453,000 home, now that rates are lower. As a result, fence-sitting homebuyers are now wading into the market. “Home prices keep marching higher,” said National Association of Realtors® Chief Economist Lawrence Yun. “Only a dramatic rise in supply will dampen price appreciation.” It’s unlikely.

While new-construction sales are expected to rise 13.9% in 2024, new homes account for only about 10% of sales, far outweighed by the number of Millennials and Gen-Z’ers hoping to enter the market.

Another trend: Older homeowners with significant equity are downsizing but renting their old home instead of selling it. This actually takes a property out of the homeownership column.

Waiting for rates to fall further may not be the best strategy for buyers. Keith Gumbinger of HSH Associates agrees. “More often it seems the case that home prices generally keep rising, so the goalposts for amassing a down payment keep moving.”

The old adage “marry the house and date the rate,” may well apply. While you might not like the rate today, the housing market has almost always rewarded buyers over procrastinators -- especially if rates trend downward, opening up future refinance opportunities. If you or someone you know are anxious to buy a home, let’s get that conversation started! Contact us today.

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