As the Federal Reserve begins cutting rates, it will have a favorable impact
on lending conditions and mortgage rates, according to National
Association of Homebuilder’s Rob Dietz.
All signals indicate the Federal Reserve Open Market Committee will cut
rates at its September meeting after eight consecutive rate pauses. With
the unemployment rate rising to 4.3% in July and inflation levels
measuring less than a percentage point above the Fed’s long-term target of
2%, economic conditions and Fed messaging suggest rate cuts will begin in
September, with an additional cut likely in December.
“The bond market is virtually pricing a 100% chance of [a September rate
cut], so investors believe it is coming. We think it is likely we will see
another rate cut in December, and both of those are expected to be 25-
basis-point (bp) [cuts],” says NAHB chief economist Rob Dietz. “We are
seeing an economy that is cooling and slowing, but otherwise showing
solid signs despite elevated rates.”
Mortgage Rates
While not directly controlled by the fed funds rate, long-term mortgage
rates will be indirectly influenced by rate cuts. Dietz says rate cuts, coupled
with inflation remaining in line with expectations, will put downward
pressure on long-term interest rates.
“We think the Fed is likely to be entering a period of fairly predictable 25-
bp cuts over the next few quarters. We are looking at two under our
current forecast for the rest of the year, and next year we could see four to
six depending on the data,” Dietz says. “The impact on long-term interest
rates is that the 30-year fixed-rate mortgage by the end of 2025 could fall
below 6% on a sustained basis. That would be good for demand.”
Presidential Election
With a September rate cut a near guarantee, many economists suggest the
result of the November presidential election will not impact the Fed’s
activity during its December meeting.
“It appears, at least the bond market seems convinced, that the Fed is not
looking at the political calendar right now,” Dietz says. “The macro data
right now that inflation is moderating, getting closer to the 2% [long-run
target], that’s a green light for the Fed to cut.”
Dietz says the decline of total job openings near 8 million is also a strong
green light for the Fed to cut independent of the election results.
“Whether it is new spending programs or tax policies, anything that can
increase the federal debt represents an interest rate risk for the residential
construction industry,” Dietz says. “We will be going from watching the
Fed and hoping the Fed cuts rates to benefit the industry to looking at the
size of debt and its impact on mortgage interest rates.”
Dietz says as federal debt levels increase, it will put upward pressure on
long-term interest rates. He shares that steadily increasing federal debt,
caused by additional spending and expansions for programs such as Social
Security and Medicare, is likely to increase long-term nominal interest
rates, including mortgage interest rates.
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