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Lower inflation points to more rate cuts before end of 2024

Lower inflation points to more rate cuts before end of 2024
by Brad Cartier, posted in Newsletter

Christopher Rugaber of AP News reports that the Federal Reserve’s preferred inflation gauge shows a continued easing of price pressures, with inflation rising just 0.1% from July to August and core prices also slowing. This has fueled expectations for further interest rate cuts, with the Fed already implementing a half-point cut and planning additional reductions later this year. With inflation now close to the Fed’s 2% target, analysts anticipate continued rate cuts in 2025 and 2026 while consumer spending and income growth remain modest and the U.S. economy continues to expand at a healthy pace.

Elisabeth Buchwald of CNN reports on this win for the Fed, where the Personal Consumption Expenditures (PCE) price index showed a significant cooling in price pressures, with a 2.2% year-over-year increase in August, down from 2.5% in July. This is crucial because the PCE index captures broader consumer behavior, accounting for substitutions to cheaper goods when prices rise. Its closer alignment with actual spending patterns makes it a more accurate reflection of inflation trends.

Personal consumption index down

Source: CNN (October 2024)

Matthew Boesler of Bloomberg highlights that consumer spending increased modestly by 0.1%, reflecting a cautious economic environment. While incomes rose slightly, the restrained growth and declining savings rate suggest consumers are becoming more frugal. This slowdown in spending, coupled with eased inflation pressures, supports the Fed’s decision to pursue rate cuts. The broader cooling in prices, particularly for goods, is expected to keep the Fed on track for further rate reductions as the economy decelerates.

As such, Matthew Sellers of MPA reports that another significant rate cut is likely in October. Traders anticipate a 53% chance of another 50 bps cut at the Fed’s next meeting. While rate cuts typically follow economic downturns, optimism surrounds the possibility of a “soft landing” for the U.S. economy, avoiding recession despite past trends. However, some analysts warn that aggressive cuts could maintain elevated inflation, and it’s uncertain if the Fed’s easing cycle will be as impactful as hoped, with interest rates likely settling higher than pre-pandemic levels.

Indeed, Jeff Cox of CNBC puts a finer point on the potential of a rate cut: “In recent days, Fed officials have switched their focus from inflation fighting to an emphasis on supporting a labor market that has shown some signs of softening. At their meeting last week, policymakers indicated a likelihood of another half percentage point in cuts this year then a full point in reductions for 2025, though markets expect a more aggressive path.”

Mortgages

According to the Mortgage Bankers Association (MBA), the national median mortgage payment decreased to $2,057 from $2,140 in July. This marks the fourth month of improved affordability due to lower mortgage rates, rising incomes, and slower home price growth. Edward Seiler, MBA’s Associate Vice President, Housing Economics, comments on the data: 

“Homebuyer affordability conditions improved for the fourth consecutive month, with lower mortgage rates, rising incomes, and slower home-price growth giving prospective buyers’ budgets a much-needed boost…MBA expects that lower mortgage rates, coupled with increasing housing inventory, will entice additional homebuyers to enter the housing market.”

MBA also reported that mortgage applications rose by 11.0% for the week ending September 20. The Refinance Index surged 20% from the previous week, up 175% compared to last year. The seasonally adjusted Purchase Index also increased by 1%, while the unadjusted Purchase Index rose 0.4% from the previous week and was 2% higher than a year ago. This growth reflects increased mortgage activity, particularly in refinancing.

Mortgage applications up

Source: HousingWire (October 2024)

According to Dana Anderson of Redfin, buyers are returning to the market in part due to lowered rates. Mortgage demand surged, with mortgage-rate locks rising 68% from a month earlier and mortgage-purchase applications increasing by over 10%. Many homebuyers had been waiting for the rate cut to lock in their mortgages, contributing to the sharp rise. Additionally, Redfin’s Homebuyer Demand Index reached its highest level since May, signaling improved buyer interest. Lower mortgage rates and a 4.4% year-over-year decline in median monthly housing payments are helping drive demand, even as home prices continue to rise modestly across the country.

Courtenay Brown of Axios reports on potential future rate cuts, highlighting that Fed Chair Jerome Powell signaled that more interest rate cuts are likely but emphasized the Fed is not in a rush to lower rates quickly. While inflation is nearing the Fed’s 2% target and the labor market remains healthy, Powell indicated that future cuts will be gradual unless the economy slows more than expected.

Construction update

According to the National Association of Home Builders (NAHB), single-family housing starts increased by 15.8% to a seasonally adjusted annual rate of 992,000 in August. This increase was driven by solid demand and moderating mortgage rates despite ongoing challenges such as labor shortages and high material costs. Overall housing starts rose 9.6%, though multifamily starts, including apartments and condos, dropped by 4.2%. Builders remain optimistic, with rising permits for new homes indicating future growth. 

Orphe Divounguy of Zillow comments on new home sales, which have decreased recently. There were 716,000 seasonally adjusted annualized new single-family home sales in August, down 4.7% from July but up 9.8% compared to August 2023. That said: 

“Although home buying activity tends to decline this time of year, the slowdown in new home sales could be short-lived since the latest survey data from the National Association of Home Builders showed an increase in builder confidence, coupled with a decline in the share of builders cutting their prices or offering incentives. The average price reduction also fell for the first time since July 2022.”

Keith Griffith of Realtor.com reports on new construction, highlighting that the median price of newly constructed homes dropped to $420,600 in August, a 4.6% decrease from last year, as builders offered more incentives to attract buyers facing affordability issues. Sales of new single-family homes fell by 4.7% from the previous month but were up 9.8% compared to last year, supported by lower mortgage rates. 

Median sales price

Source: Realtor.com (October 2024)

According to Griffith, builders have responded to affordability challenges by reducing prices, offering incentives, and focusing on smaller, more affordable homes. Inventory of new homes grew by 1.7%, while completed, move-in-ready homes reached their highest level since 2009. Despite rising supply, demand for new homes may slow as more existing homes enter the market.

Despite this, Jeff Tucker of Inman reports on the popularity of newly constructed homes, reporting that more than 1 in 6 houses sold were newly built, marking an increase from 1 in 8 the previous year. The annualized sales rate of new single-family homes reached 716,000, slightly down from July but still outpacing last year’s total of 666,000. Builders are attracting buyers with incentives like interest-rate buydowns, and new homes are now priced slightly lower than existing homes, making them a competitive option. 

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