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Fed officials said this week that despite some signs of improvement, it was too early to declare victory in the battle to return inflation to the 2% target.
This may dampen optimism about the rapid recovery of the mortgage sector.
According to minutes from the Federal Open Market Committee’s (FOMC) December meeting, where officials raised the federal funds rate by 50 basis points, monetary policymakers agreed that inflation data for October and November were encouraging.
This suggests that the pace of price growth is slowing down. Therefore, none of the committee members predicted that it would be appropriate to begin lowering the federal funds rate target before 2023.
But they plan to keep monetary policy flexible, meaning they will take decisions at each meeting.
Since monetary policy plays an important role in financial markets, undue easing of financial conditions, particularly due to public misunderstanding of the Committee’s reactive function, would hamper the Committee’s efforts to restore price stability.
What does this mean for mortgage rates and the real estate industry? Despite the difficult outlook, housing economists see interest rates falling this year.
Slowing inflation gives hope for better mortgage interest rates
On Thursday morning, Freddie Mac’s weekly survey showed the 30-year fixed-rate mortgage rate at 6.48% per year. on January 5, up 6 basis points from the previous week. (A year ago, mortgage interest rates averaged 3.22%).
Meanwhile, the Mortgage Bankers Association (MBA) estimated that the same rate on qualified loan balances ($647,200 or less) rose to 6.58% in the week ended Dec. 30, from 6.42% the previous week.
While mortgage market activity fell sharply last year, inflationary pressures are easing and should lead to lower mortgage rates in 2023, Sam Khatter, chief economist at Freddie Mac, said in a statement.
He added that homebuyers are waiting for interest rates to drop further, and when they do, a strong job market and strong demographic headwinds from millennial renters will support the buying market.
MBA President and CEO Bob Broeksmith agreed that while mortgage rates have risen slightly in recent weeks, MBA expects them to drop to around 5.2% by the end of 2023.
We expect lower interest rates and rising inventory levels to be two positive factors for households looking to buy a home in 2023.
But all eyes are on the labor market
Mortgage rates typically follow movements in the bond market and have outpaced the Fed, said Logan Mohtashami, principal analyst at HousingWire.
Mohtashami said the Fed is in a challenging phase of speech as it nears the end of its rate hike cycle.
Inflation is slowly falling, but the Fed doesn’t want financial conditions to worsen before unemployment falls. Labor market data is now “very critical” for 2023, Mohtashami said.
On Thursday morning, the Labor Department reported that new jobless claims for the week ended Dec. 31 were 204,000, down 19,000 from the previous week’s revised level. That was enough to raise yields on US 2-year and 10-year Treasuries.
Mortgage rates will move with the bond market, which knows that inflation is slowing, Mohtashami said.
But once they see the job market collapse, the bond market moves lower, which lowers mortgage rates.
Reference Source: Housing Wire
