The end of the year is always interesting, all the projections and forecast fly for the upcoming year. So, a lot of information I am going to share today comes from a business insider articles from UBS bank, CNBC, Forbes. In the article they are making the claim, saying that the Federal Reserve will shock markets with aggressive interest rate cuts in 2024. The slow economic growth would drive the FED to cut rates by 275 (2.75%) basis points by the end of 2024. The rationale here is that the economy is going to slow with unemployment ticking up and the fed's going to have no choice but to cut rates. Personally, its not so much whether is it going to happen or not, but the conversation is trending in that direction, right when you start seeing articles like this pop up very rarely are they right on point, back in 21/22 we started hearing fed's going to start pumping rates higher, nobody anticipate rates to be 8% by the end of 2023 but it did reach 8%. Everybody were saying expect 5% or 6%, so just the fact major banks like UBS expects the rates to come down is based on the assumption that FED increase interest rates year long and very rapidly, and it's starting to show some impact both on growth of GDP as well as employment, and as we continue into 2024 FED's job is to balance unemployment on one side and high inflation on the other side, keeping both of them relatively healthy. In last couple of years, with low-rate environment and money printing the inflation went high, and the unemployment was like historically low, so FED said let's sacrifice unemployment, let unemployment go up a little bit to bring down inflation. which is what they've done by increasing rates. The idea is they're basically trying to impact (increase) unemployment to slow the growth of the economy and in doing that they're hoping that less buyers, less spending, less borrowing will lead to lower inflation.
So, looking into 2024 we're going to see if unemployment goes up (which it has ticked up) that means the FED can get less aggressive and start to bring down rates to boost the spending and who benefits when rates come down, obviously home buyers' people who utilize debt. People who need to barrow. So, if this ends up being the proper prediction, what will happened to housing market? could it be another bloodbath like 2020 and 2021 where everybody was 100K over asking, waiving inspection and writing love letters?
so yeah, how do we use this information to prepare for 2024?
1. Number one everybody who bought a house in the last year or two years there's going to be refinance opportunity. So if you have a high interest rate, what I would say is get on a follow-up with the loan officer. Loan officers I work with do this automatically, they set the rate reminders, but I would reach to your loan office and say hey "I just want to track when the rates get to 5 and review the file again", lender should be able to set a stop point so you can capture that savings and not miss out on refinancing.
2. Number two, if you're thinking of buying and i am not fan of telling people to buy just because rates might drop but is there going to be more competition if rates go to 4% or 5 % ? Just speaking from the personal experience because we bought our first house in Dec 2022 and those of us who are actually in the real estate market and familiar with what was going on back then, I don't speak for everybody, but I don't want to go back to that again, that was wild. Every house had 20-30 offers, you had to offer 50-100K over the appraised value, waive inspection and contingencies. so is there an advantage to getting into a property now knowing that these rate cuts talks are starting to materialize as the projections of where the next year is going to be? I would say yes.
At the time of this writing, the running rate was little north of 7%, cutting 2.75% would mean rate will be 4.25%. I think everybody would agree that if we end up at 4% or even 5% rates home prices aren't going to go back to 2020, so it's going to have a worsening impact on our already overinflated housing prices coupled with lack of quality inventory. Here's what I typically focus on, the interest rates because rates affect the affordability of the home, so the higher rate obviously means higher payment which makes it harder for people to pay more for a house, so even if we say okay prices can't keep going up and if it's that expensive to buy a house. what I don't think FED plan for and they never do is the supply side, they only focus on the demand (increasing rate will cut the demand) what we are finding out in real time is that as rates went up existing homeowners or people who bought when rates were 2 and 3% said well I don't want to sell my house and lose my 2% rate or my 3 % rate and go buy one at 7% or 8%. so, sellers are going to keep their homes off the market, so even though demand went down, supply went down even more, and it made houses even more expensive. so now the prices aren't going down that much, and the rates are 2 to 3 times higher than what they were before.
So bottom line is if you want to get the sellers who are keeping their houses off the market to put them back on the market FED must cut rates close enough to the rate that sellers currently have and that they feel like selling their house and buying another one is roughly equivalent to the rate or the mortgage that they were paying before. so if we just drop it by a 1/2 or 1%, people aren't going to move. Rates are at 7-8% now, you drop them to 6%, they're sitting on a 3%. Most sellers are still going to stay, but if we get down to 4% some of those sellers will start to say okay now, I can see it makes sense.
Lastly, when I hear an opinion, I always want to understand the logic behind it, coming into 2024 we're going to be having another election year, we have a historically wide budget deficit and a fractured political landscape. It's going to be very difficult to get the government to support what the FED is doing, any new president coming in with economy is getting tougher and tougher, typically presidents and their cabinets want the economy to look like it's doing well so the fed's going to be getting pressure from the president whoever that's going to be next year I need you to lower the rates to make me look good. we're also going to have huge budget deficit and we already have a ton of debt. The more that the FED raises the rates the more expensive for govt.to pay people back who owns treasury notes. Do I think it's going to drop 275 basis points I don't know but it will drop and if it does that's just means you're probably going to have incredible demand over a still limited supply of real estate assets. so if that does happen and you're an investor or looking to buy a house but waiting for rates to drop my advice would be don't wait to see if rates are going to keep coming down even more because you may find that there just isn't any supply for you to be able buy.
Thank you for reading. Please let me know if there is anything at all I can do for you.
Click here for the articles.
Will Mortgage Rates Go Down in 2024? What Homebuyers Should Expect (businessinsider.com)
When Will Interest Rates Come Down? (cnbc.com)
2024 Recession Means Fed Will Bring in Huge Interest-Rate Cuts: UBS (businessinsider.com)
Mortgage Rates Forecast For 2024: When Will Rates Finally Come Down? – Forbes Advisor
