Mortgage rates eased this week for the first time in 2024 as new employment cost data suggest a continued loosening of the labor market and more disinflation in the near term. Although the Federal Open Market Committee (FOMC) opted to hold the line again, the incoming economic data suggests more disinflation is on the way and rate cuts could be appropriate in the coming year. 

While inflation appears likely to ease further, last month’s core inflation data showed a small uptick, and economic activity is still expanding at a solid pace. The Fed will likely maintain the current interest rate target range until the fog clears and inflation stabilizes at or below the 2 percent inflation target.

What it means for rents: 

The Employment Cost Index (ECI) – the Fed’s preferred measure of the change in labor costs – slowed to its lowest level in more than two years. Slowing compensation growth will likely result in a further cooling in rents, which make up nearly half of core inflation. Recognizing this likely slowdown in the months ahead, the FOMC removed language in its statement that it is willing to raise its target for the federal funds rate.

Annual rent growth measured by Zillow’s Observed Rent Index has cooled to just 3.3% as of December, down from 16.2% in February 2022. The index is a leading indicator of the rent components of the Consumer Price Index, meaning this steady, lower level of growth should continue to pull down the rent portion of the CPI as time goes on. Rents typically grew about 4% annually before the pandemic.

What it means for mortgage rates and the for-sale market: 

So long as core inflation and economic activity continue to moderate, mortgage rates aren’t expected to rise further. If layoffs remain low, and mortgage rates ease, housing market activity should rebound modestly this spring – meaning more listings coming on the market and more sales.