MNI INTERVIEW: Home Sales To Rise Gradually As Fed Eases-MBA

A U.S. mortgage market battered by high Federal Reserve interest rates will get some relief over the next couple of years as the central bank gradually reduces borrowing costs, reviving sales activity, Mortgage Bankers’ Association chief economist Michael Fratantoni told MNI.

The Fed is likely to cut rates three times this year, which would probably leave the 10-year note a little bit below 4% and the 30-year mortgage rate, currently around 6.8%, close to 6% by the end of 2024.

“We see a slow, uphill climb over the next couple of years, particularly rapid growth in new home sales, slower growth in existing home sales. We expect home prices are going to continue to grow because we’re just structurally undersupplied,” said Fratantoni in an interview.

He thinks the fed funds rate will end the cutting cycle around 2.5-3%, down from the current 23-year high range of 5.25-5.5%.

“With that as an end point, don’t expect the 10-year (Treasury yield) to drop too much further from where we expect it to end the year. That means mortgage rates level out somewhere between 5.5-6% in 2025," he said. (See MNI INTERVIEW: Fed Can't Let Guard Down On Inflation-Weinberg)

Fratantoni said the Fed’s dovish December decision loosened financial conditions enough to spark some new sales activity.

“That was absolutely a spur to some activity – I don't want to overstate it is still a slow market,” he said. “On the refinance side, nobody has an incentive to refinance. On the purchase side, we’re just short of having inventory, so even though there are some interested buyers out there, there are just not properties for them to look at.”

FOCUS ON SPREAD

Fratantoni said he’s keenly focused on the spread between the 10-year Treasury rate and the 30-year mortgage, which widened well beyond historical levels recently.

“Historically we pencil in an average spread between a 30-year mortgage rate and a 10-year Treasury rate of about 180 basis points. For much of last year it was about 300, after the December meeting it dropped between 250 and 260 and has stayed there,” he said.

“We also expect that spread is going to keep tightening and so you’ll get a bigger drop in mortgage rates than you’ll get in 10-year Treasuries,” he said.

The MBA sees 14% growth in new home sales and 6% growth in existing home sales for 2024, with annual price growth averaging between 3-4% in the next couple of years.

SHELTER COSTS

Fratantoni said the persistence of shelter cost pressures as a key factor in the BLS measures of inflation remains a puzzle but added Fed officials understand that the effective role of housing on inflation is declining over time.

“I would say that the leadership including Chair Jerome Powell and the staff are very intimately aware of the measurement issues that are involved here,” he said. “They’re not worried too much about the shelter cost component, they are worried about core services.”

Like other forecasters, Fratantoni has moved away from predicting an outright recession in the broader economy, but he still expects a significant slowdown this year, with the unemployment rate climbing to around 4.5% from the current 3.9%.

“It'll be a noticeable slowdown,” he said, pointing to early signs of deterioration in consumer sentiment and some underlying employment data such as openings and quits.