Mortgage Rates Fell Again As Fed Acknowledges Economic Slowdown, Potential Rate Cuts Ahead

Mortgage rates fell further this week, thanks to the Federal Reserve’s revisions to their summary of economic projections suggesting the fiercest battle in the war against inflation may have been won. Although the FOMC opted to hold the line again, revisions to the summary of economic projections show economic growth is slowing and rate cuts could be appropriate in the coming year. Among Zillow’s predictions for 2024 is a slightly rosier affordability picture for buyers, and today’s news could lead to progress on that path.
Long dated yields like that of the 10-year Treasury note – which mortgage rates tend to follow – depend on expected inflation and future economic growth. One year-ahead inflation expectations have fallen, the labor market and the housing market are coming back into balance and normalizing. Zillow data shows home values are only up 2.8% when compared to a year ago and annual rent growth measured by Zillow’s Observed Rent Index – a leading indicator of the rent components of the Consumer Price Index – has cooled to just 3.3%. The typical rent grew roughly 4% annually before the pandemic. Potential headwinds in 2024 could slow the economy further.
With inflation and inflation expectations continuing to move toward the Fed’s 2% target, a Fed policy pivot in 2024 has become more likely, if only to prevent monetary policy from becoming so restrictive that it precipitates an economic downturn.
So long as core inflation and economic activity continues to moderate, mortgage rates may finally start to level off. While mortgage rates are still higher than they were a year ago, the recent decline is welcome relief for prospective home buyers who witnessed 23-year highs and record-high mortgage costs in October. Market participants and the Fed will be looking for more disinflation in the new year. Otherwise Treasury yields could surge back up, pulling mortgage rates up with them.