Dec. 6, 2024: What Strong Labor Data Means for Mortgage Rates Ahead!
Are you dreaming of a new home this holiday season? Well, brace yourself for a reality check – those hopes for lower mortgage rates might just be dashed.
Recent job reports indicate a slight uptick in unemployment this November, with the jobless rate nudging up to 4.2% from October’s 4.1%. On the upside, wage and job growth are thriving, surpassing what investors anticipated. However, while this news won’t trigger a spike in bond yields and mortgage rates, it also won’t bring about any significant decreases. So, don’t hold your breath!
With just two weeks left until the Federal Reserve’s pivotal policy meeting on December 18, all eyes are on the central bank. They’ve already cut rates twice this year: a 0.5% reduction in September followed by a 0.25% drop in November. Investors are now placing bets on yet another 0.25% cut this month. But, as experts suggest, that inflation data dropping on December 11 will play a crucial role in the central bank’s decision-making process.
Here’s the kicker: even if the Fed lowers rates again, it might not mean much for your mortgage. While these rates are influenced by the Fed’s moves, they are much more closely linked to the bond market’s fluctuations. In fact, after the Fed’s cuts earlier this fall, we saw bond yields and mortgage rates rise—not the outcome many were hoping for—as stronger economic data and inflation concerns came into play.
As we look ahead, the sentiment among market watchers is that the Fed may be slowing down its pace of interest rate decreases. At a recent symposium, St. Louis Federal Reserve President Alberto Musalem hinted, “We might need to consider pausing or slowing the pace of interest rate reductions.” For those eyeing that dream home, this means the road ahead could keep upward pressure on mortgage rates. According to Logan Mohtahsami, an analyst at HousingWire, “For mortgage rates to drop below 6%, we’ll need to see some significant economic weakness.”
Why does labor data matter for mortgage rates?
Labor data and inflation reports serve as essential indicators of economic health and guide the Fed in adjusting interest rates. Their primary goals? To achieve maximum employment while keeping inflation in check. While the Fed can’t directly dictate mortgage rates, their policies shape lenders’ behaviors and ultimately affect borrowing costs.
Since early 2022, the Fed has been on a mission to rein in inflation, implementing aggressive rate hikes. But with inflation now stabilizing and the labor market showing some signs of strain, the Fed has pivoted towards rate cuts. Each cut reduces borrowing costs for banks, which ideally translates to better rates for consumers—yes, including mortgages.
But let’s not forget—the mortgage market is notoriously volatile. Rate movements often hinge not on current events but rather on what investors foresee happening based on economic indicators, Fed communications, and broader geopolitical issues.
Are mortgage rates on the rise due to the election?
It’s no fluke that mortgage rates have surged since last month’s election results were confirmed.
In October, many began to “price in” a Trump victory, leading to a reversal of the mortgage rate declines we saw through the summer. “Right now, upward pressure on mortgage rates stems from rising debt fears and a belief that the incoming administration could boost economic growth,” explains Ali Wolf, chief economist at Zonda.
Fed Chair Powell has remarked that it’s too early to determine how this new administration will impact Fed policies regarding interest rates. But one thing is clear: uncertainty looms.
Will mortgage rates drop by year-end?
Home loan rates have a tendency to climb quickly but are far more reluctant to fall. It takes a series of weak economic reports to encourage lower rates, yet just one robust data point can send them soaring. Though there was optimism about rates dipping below 6% by the end of 2024, that hope appears to be fading.
According to Fannie Mae, average 30-year fixed mortgage rates are expected to remain above 6.5% until early 2025. Unfortunately, this suggests that housing affordability will be a stubborn challenge. Higher treasury yields and mortgage rates are likely to persist, keeping potential homebuyers sidelined as they navigate the high-interest-rate and pricey housing landscape.
What else is happening in the housing market?
The current unaffordable housing market is a product of soaring mortgage rates, a persistent housing shortage, exorbitant home prices, and diminishing purchasing power due to inflation.
🏠 Low housing inventory: A balanced market typically has five to six months of housing supply, but most markets are hovering around half that. Even with a construction uptick in 2022, we still face a deficit of about 4.5 million homes, according to Zillow.
🏠 Elevated mortgage rates: At the start of 2022, mortgage rates were at historic lows, but as inflation surged, rates doubled within a year. Today, high mortgage rates continue to keep millions of potential buyers out of the market, stalling sales even during prime buying months.
🏠 Rate-lock effect: Most homeowners are locked into rates below 6%, with many enjoying rates as low as 2% and 3%. This locks them into their homes, as moving would mean facing much higher rates for a new mortgage. Until rates dip below 6%, there’s little incentive for them to put their homes on the market, leading to a continued inventory shortage.
🏠 High home prices: Despite limited demand in recent years, home prices have remained elevated due to low inventory. The median U.S. home price hit $434,568 in September, reflecting a 5.1% annual increase according to Redfin.
🏠 Steep inflation: Inflation drives up the costs of everyday goods and services, squeezing purchasing power. It also impacts mortgage rates; high inflation often leads lenders to increase interest rates on loans to maintain profitability.
Expert advice for homebuyers:
Rushing into a home purchase without understanding your budget can be a costly mistake. Here’s what experts recommend:
💰 Build your credit score. A strong credit score is crucial for securing a mortgage and getting favorable rates. Aim for a score of 740 or higher to boost your chances.
💰 Save for a bigger down payment. A larger down payment means a smaller mortgage and better interest rates. If possible, aim for at least 20% to avoid private mortgage insurance.
💰 Shop around for mortgage lenders. Comparing offers from various lenders can help you find the best rates. Experts recommend gathering at least two to three loan estimates before making a decision.
💰 Consider the rent vs. buy equation. Weighing the pros and cons of renting versus buying goes beyond monthly payments. Renting offers flexibility, while buying can build wealth. The right choice depends on your financial situation and long-term plans.
💰 Consider mortgage points. You can lower your mortgage rate by purchasing points upfront. Each point typically costs 1% of your total loan amount and equates to a 0.25% decrease in your rate.
Get ready to navigate the complex housing market with these insights!
