Why are mortgage rates falling, and how will this trend impact home prices?

Mortgage rates on a 30-year-fixed rate loan fell again this week to 6.35 percent, down more than a point from their recent high of 7.79 captured in October 2023. In early August, when US markets suffered great losses, which have been partially rebuilt since, many economists and investors called on the Fed to decrease rates during the September meeting. A rate cut could bring mortgage rates further, which could entice some buyers back into the market.

However, no cuts are guaranteed, particularly after the Personal Consumption Index, which the Fed uses to evaluate inflationary pressure in the market, grew 0.2 percent in July. In a speech on his and the bank’s economic outlook, Fed Chair Jerome Powell made no commitments to reducing the federal funds rate. He assured those listening that the bank would evaluate all data available to them at the time.

The Federal National Mortgage Association, more commonly referred to as Fannie Mae, has released its economic forecasts for August and estimates that rates will average out to 6.4 in the fourth quarter of 2024. Fannie Mae’s July estimate had projected rates to fall an additional tenth of a point, but the Fed’s reluctance to reduce rates at its July meeting has forced them to readjust upward.

What this means for the housing prices

The Association also noted that although mortgage rates have fallen, and prices are expected to follow, the decreases are not expected to significantly impact home sales, which are “expected to come in lower than previously forecast through the rest of 2024 and then not pick up meaningfully until further out in 2025.”

Fannie Mae’s Economic and Strategic Research group argues that potential buyers, currently on the sidelines, will come back into the market when the rate on a 30-year mortgage falls to 6 percent or below and when wage growth outpaces growth in home prices. While home prices may fall, they remain affordable to many potential buyers. Chair Powell described it as “unlikely” that the labor market would become a significant source of inflation, with competition between workers increasing as the number of jobs available reduces and the workforce increases.

Over the last year, unemployment has risen nationally from 3.5 to 4.3 percent. The source of inflationary pressure in the labor market was primarily because workers were in a much more powerful position in 2022 and 2023 to demand better pay when many companies reported a labor shortage. This period also saw substantive interest and enthusiasm in organizing one’s workplace to ensure those gains were protected in the long run. Now that much of this power has been erased, the Federal Reserve is less worried about the labor market heating up once again. Chair Powell did add that he and his colleagues at the Fed “do not seek or welcome further cooling in labor market conditions.” The August Employment Report will be released on Friday, September 6. It will be an important market to see if the current monetary stance of the US central bank has continued to drive up inflation.