Below, find insights on the Fed’s approach to the current bull market, the “lock-in effect” of rising mortgage rates and predicted cuts from our partners at New American Funding.
Top News
On Wednesday, the Fed made it clear that it does not intend to step in front of the current bull market run as the three major averages closed at new record highs: the Dow Jones hit 39,512.13 (+1.03% D/D), the S&P 500 reached 5,224.62 (+0.89% D/D), and the Nasdaq rose to 16,369.41 (+1.25% D/D).
These new all-time highs were in response to the Fed keeping its policy rate unchanged in the 5.25-5.50% target range for the fifth consecutive meeting.
The Fed’s Chair, Jerome Powell, took a semi-dovish stance during his press conference on March 21st, and projections point to the Fed remaining on track to achieving its desired soft-landing outcome. Bond markets and mortgage rates were largely unchanged by this “no news is good news” event.
Key Takeaways & Stats
- The Fed projects the economy to accelerate to 2.1% growth in 2024, an upgrade from the 1.4% growth previously expected.
- The unemployment rate is only expected to hit 4.0% in 2024, an improvement from 4.1%.
- Inflation is expected to keep falling in the long run. That said, recent inflation readings pointing to a slower decline have pushed projections up to 2.6% from the previously anticipated rate of 2.4% by the end of 2024.
- The Fed funds rate is projected to remain at 4.625% by the end of 2024. However, the narrative did change for the years after that, as members shifted their expectations toward higher rates being necessary to control inflation.
- At the moment, the Fed and the markets appear to be on the same page. Both agree that the policy rate will settle in the 4.5-4.75% range by year-end, following three rate cuts from here with the first rate cut coming after the June meeting.
The Lock-In Effect of Rising Mortgage Rates
With interest rate conversations taking center stage these days, the Federal Housing Finance Agency (FHFA) has released timely research surrounding the “Lock-In Effect of Rising Mortgage Rates” and their impact on the housing market and mortgage industry.
Key Findings from This Report:
- The mortgage rate lock-in is the worst it has ever been since 2000. In Q4 of 2023, 68.9% of borrowers had a rate less than 3%, meaning their fixed-rate mortgage was more than 3% lower than the rate that a borrower could obtain on the same mortgage.
- As the spread between the existing rate and the new rate negatively increases, the odds of a home sale are drastically reduced. Specifically, the researchers found that for every percentage point that market mortgage rates exceed the origination interest rate, the probability of sale is decreased by 18.1%. The opposite is also observed. As the delta moves into positive territory the likelihood of a home sale increases. When the spread is too positive, the probability of selling diminishes and people may want to refinance and not sell. The research also explores the likelihood of a sale when controlling for various home, borrower, and loan characteristics. One example is that non-white borrowers tended to be more sensitive to the lock-in effect than white borrowers, hinting at reduced mobility and not living in homes that they would prefer.
- Mortgage rate lock-in led to a 57% reduction in home sales with fixed-rate mortgages in Q4 of 2023 and is projected to remain depressed. A 1% increase in interest rates would intensify the current lock-in effect from -57% to -71%. A 1% or 2% rate decrease would lessen the effect to -40% or -23% respectively. However, the decay of the effect over time is quite slow in all scenarios and the lock-in effect could remain with us for quite some time. In addition to a reduction in sales the research report pointed out that the lock-in effect reduced supply causing an estimated cumulative increase in home prices by 5.74% since the start of 2022, outweighing the direct impact of elevated rates, which decreased prices by 3.29%, inflating home prices by 2.45% and worsening affordability.
- Lastly, the lock-in effect prevented 1.326 million sales between Q2 of 2022 and Q4 of 2023 due to a decline in the rate of home sales.
