September 18, 2024
Today’s big news is the much anticipated rate cut. The Fed announced an aggressive 0.5% rate cut this afternoon, instead of the 0.25% most were expecting. This is its first reduction since the emergency cuts during the early days of COVID. Aside from the COVID emergency, the last 0.5% cut was in 2008 during the financial crisis.
The yield on the 10-year Treasuries, often cited as a bellwether for mortgage rates, slightly increased after the announcement, indicating that the bond market may have already priced in the 0.5% cut and adjusted accordingly. While this larger cut (0.5% vs. 0.25%) may seem like good news for consumers and the real estate market, it could signal trouble for the overall economy and stock market. It suggests the Fed is concerned that the economy is weaker than expected and is trying to prevent a deeper slowdown or recession. Last month’s massive downward revision of this year’s monthly jobs numbers reinforces the idea that the job market is much weaker than previously thought. From a historical perspective, the last two easing cycles that began with a 0.5% rate cut were followed by stock market corrections ranging from 15-22% over the following 12 months, whereas the last two cycles that started with 0.25% cuts were followed by gains in the markets. Let’s hope this easing cycle doesn’t follow the historical trend.
From a real estate standpoint, I think this will encourage many buyers who have been sitting on the sidelines to re-enter the market. Mortgage demand has picked up recently as rates have been declining, and I expect that trend to continue as more buyers jump back in. However, I don’t think this will significantly affect sellers, as rates are still too high for most people to consider selling a home with a 2-4% mortgage rate and replacing it with a rate in the high 5% to low 6% range. Rates may need to get below 5% before many homeowners with ultra-low rates will consider selling. Until then, we’ll continue to struggle with the inventory issue that has been plaguing us for several years.
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