Earlier this week (November 14, 2023), leading economic data indicators signaled a cooler-than-expected inflation report. U.S. Treasury yields experienced a notable decline in reacting to this latest information, leading to a significantly slower rate of price increases in the previous month.
Moreover, the odds of another rate hike this year are effectively zero (according to CME FedWatch Tool), and still very unlikely in January 2024. Real wages continue to increase and are now above pre-pandemic levels as the U.S. labor market continues its resiliency and recovery dating back to March 2020.
What We’re Thinking
Upright believes this is all positive news for mortgage rates and the housing sector, and we believe that markets are likely to respond positively to the ongoing trend of lower rates.
If we continue to see cooling inflation and the Federal Reserve determines additional rate hikes are not necessary, the volatility we have consistently experienced over the last 12–18 months may be a thing of the past. This could likely result in an increased supply of homes listed for sale, while also allowing developers to gain significant confidence in their abilities to forecast where remodeled or new homes could sell in the next 6–12 months.
Mortgage purchase applications have also increased for the second straight week, suggesting that homebuyers on the sidelines are already responding favorably to the recent dip in mortgage rates. Many leading experts, including Dr. Lawrence Yun, Chief Economist of NAR Research, suggest that mortgage rates will drop to somewhere between 6%–7% by early spring 2024. Lower mortgage rates coupled with the typical spring seasonal uptick in listings could result in a more competitive and robust housing market in the near future.
The Actual Numbers
The U.S. Labor Department specifically announced:
- 10-year Treasury yield dropped by nearly 18 basis points1, settling at around 4.46%
- Two-year Treasury yield saw a 20-basis points decrease, reaching 4.8%
- October consumer price index (CPI) reported no change MoM, with a slight 0.2% increase2.
The core CPI demonstrated a year-over-year increase of just 4%, marking the slowest 12-month inflation rate since September 2021. This aligns with the Federal Reserve's efforts over the past year to guide price increases back to the 2% target — without inducing a recession.
Of specific interest to the housing market, shelter costs, which are a primary component of the core CPI, rose 0.3% in October — half of September’s shelter gains marking the year-over-year increase to just 6.7%. Owners equal rent in this category, which increased 0.4% and provides some insight into what property owners could reasonably request from tenants.
Rates: Looking Ahead to 2024
In earlier surveys by Dow Jones, economists had anticipated a 0.1% monthly rise in CPI and 0.3% in core CPI. This data plays a crucial role in shaping expectations around future interest rates, with debates intensifying over whether the central bank will pursue additional rate hikes or consider cuts, and the timing of such actions.
For several months, economists and financial advisors have emphasized the need for a balanced economic slowdown to alleviate inflation concerns. After the announcement, the options market suggested a 0% probability of a rate hike in December, with a minimal 4.1% chance for a January hike.
1One basis point equals 0.01%.
2Excluding food and energy, which are considered volatile.
This article and the Upright blog are intended for informational and educational purposes only. This content is not investment, tax, financial planning, legal, or real estate advice and should not be taken as such. Upright, as well as our employees, are not financial advisors or agents. Please consult your own financial, tax, legal, etc. experts for advice. Although Upright provides information it believes to be accurate, we make no representations or warranties about the accuracy or completeness of the information contained in this blog.