Will the Federal Reserve Cut Interest Rates in 2024? Implications for Inflation and Home Prices

Central banks across the world are now starting to cut interest rates. This begs the question, could we see the Federal Reserve in America do the same? Will this cause a reignition of inflation and cause home prices to go up further?

The Bank of Canada and the European Central Bank are cutting interest rates for the first time in four to five years.

Inflation and the Federal Reserve’s Stance

So many people are asking the question: Are Jerome Powell and the Federal Reserve going to go ahead and follow these other countries in cutting interest rates in 2024?

The answer is I don’t think so. At least not yet.

We can see the inflation rate in America is still stubbornly high. It’s around 3.4% year-over-year inflation, which is still healthfully above the Fed’s 2% inflation target, so it’s this yellow dotted line that the Fed is targeting in terms of inflation. And we’re not really there yet.

We’re not showing clear progress to that 2%, which has now caused many of the Federal Reserve governors, you know, whether it be Christopher Waller, Michelle Bowman, or other people to defend. They’re starting to say things like, “Yeah, yeah, we’re going to keep it higher for longer until we see more definitive progress that inflation is getting down to that 2% rate.”

Betting Markets and Interest Rate Predictions

You can see that the betting markets also think that the Federal Reserve will hold off on cutting rates. They believe that in the next meeting, there is a 99% chance they will keep rates the same. In July, they think it’s a 99% chance they’re going to keep rates the same. Then it’s in September when the betting markets think that we might see maybe this first rate cut, with 45% odds of a rate cut in September. By December, the end of the year, they think there is a 15% chance rates stay the same, 40% chance of one rate cut, and 34% chance of two rate cuts.

What the betting markets are saying right now is no imminent rate cuts from the US Fed, but we could see one to two by the end of the year. This is potentially a baseline expectation. There’s also still the chance that the Fed might have to increase interest rates as well in case inflation doesn’t fully get under control. We’re seeing the cost of a lot of core inflationary items actually start to reaccelerate.

The Dual Mandate of the Federal Reserve

A lot depends on inflation and the economy because the Fed has a dual mandate: price stability and maximum employment. We’re starting to see the maximum employment side of the ledger weaken.

You know, we just had a jobs report from the Bureau of Labor Statistics that said the US added 270 thousand jobs. However, digging deeper into that jobs report, you can actually see that the unemployment rate went up to 4%.

This is the first time the unemployment rate has been at 4% in two and a half years. More or less, it’s the first time the unemployment rate has been 4%. So, we’re starting to see this continual gradual increase in the unemployment rate, with the number of unemployed Americans spiking up to 6.6 million.

So, you have 6.6 million unemployed Americans, which is about 500,000 more than it was a year ago. So, dispute the fact that there are still semi-strong headline job numbers. We’re actually seeing the number of unemployed people increase, and if you talk to anyone looking for a job right now, they will tell you the job market is not good.

I know a bunch of people looking for jobs right now in different industries related to real estate, tech, and finance. It is very difficult to find a job in those industries right now, and I think there’s a big disconnect between what people are experiencing on the ground in the economy and what kind of conventional reporting is on the economy.

The more people I talk to on the ground, the more people I hear say things aren’t good. The more people I hear, you know, say things like, “I just got laid off, it’s hard for me to find a job.”

Sure enough, take a look at this data from Indeed’s Hiring Lab. The job posting website is showing that the job index is down all the way to 112. This is the lowest it’s been in terms of job openings since March 2021

It’s down 14% year-over-year, and it’s just continually trending down. This is the number of job postings on Indeed now. It’s still 12% above what it was before the pandemic, but in the post-pandemic. We were peak at 64% higher than pre-pandemic.

Now we’re at 12% higher. It’s just continuing to drop, so I think the labor market might crack at some point later this year. We’re seeing that slowdown, and if the labor market cracks, we could see the Fed forced to do some emergency pivot and cut rates earlier than expected.

Of course, this is the one kind of variable that’s hard to predict because, right now, the Fed and the betting markets are assuming one to two percent rate cuts at the end of the year.

That’s assuming that the economy kind of stays as it is.

Potential Impact on the Housing Market

If the economy were to take a nose dive, and the Federal Reserve were to, maybe, have to cut rates a little bit earlier, and then you know, you ask the question, what would happen in the housing market if the Fed did that?

If the Fed had to cut rates earlier than expected, or maybe they just do one to two rate cuts, what would that do to home prices? Well, let’s answer that question. To answer that question, we have to look at mortgage rates, where they are today, and where they could go if the Federal Reserve cuts interest rates.

Well, today, we’re around a 7% mortgage rate, and what I have baked into this orange line is like maybe a projection like if the Fed cuts rates two times at the end of the year, that would get us down to a 6.5% mortgage rate.

If the Fed cuts rates twice and inflation cooperates, those are two big ifs. But maybe we could see the best-case scenario of 6.5% mortgage rates by the end of the year. So, you’d ask, what would that do to the housing market? And you know, some people out there think that if the Fed cuts interest rates at all, home prices will go up.

I hear many realtors and mortgage brokers say that many real estate investors just wait for those rate cuts that will bring all this demand back into the Market.

But realistically, folks, cutting mortgage rates from seven to six and a half is not going to really do anything for the housing market because the affordability is so bad right now that a 50 basis point reduction in mortgage rates is going to save you like 8% or 9% on your monthly payment. It’s not that meaningful when the affordability is so bad.

Rather than see true progress, we’ll need to see mortgage rates go from six to five. If we saw mortgage rates go from six to five percent, that would bring buyers back in. But it would be seven to six and a half. I don’t think so. You know, and the other thing to think about, everyone, is like what happens when mortgage rates decline historically. This is a perspective that’s also very important for you to have as a home buyer and investor because you got to understand like why would mortgage rates decline? Well, typically, mortgage rates decline, everyone, in periods of recession.

If we take a look at historical graph of mortgage rates going back to 1971, we could see that they went up in the 70s and 80s because of the crazy inflation. But since then, mortgage rates drop during these periods of gray bars. Gray bars represent recessions. Uniformly, during a recession in the last 40 years, mortgage rates drop. I mean, in the last crash, they went from 6.5 down to 4.8.

During that last crash, it didn’t do anything to stimulate the Market. And so now we’re here at 6.99. Yeah, maybe mortgage rates go down a little bit in the next year, but there’s a good chance that that is correlated with some type of economic downturn.

If it’s correlated with an economic downturn, do not make the mistake of thinking that mortgage rate cuts are automatically stimulative. Rather, think about it from this perspective. The unemployment rate today is 4%. It’s gone up a bit over the last year, but that’s still very historically low, and it’s unlikely that that unemployment rate persists. So what would happen if the unemployment rate were to go from 4 to 7%?

Let’s just think about that type of environment. If the unemployment rate were to go from 4 to 7%, that means that the number of unemployed Americans would go from around 6.5 million to 10 million, an additional 3.5 to 4 million unemployed Americans.

If the unemployment rate were to go from 4 to 7%, then you got to ask, well, what would that do to housing market demand, and what would that do to supply if all of a sudden 4 million people lost their job? That would lead to more foreclosures and evictions and more supply hitting the Market.

The reason I’m going through this type of hypothetical analysis, everyone, is so you guys can establish these different frameworks for what might happen and not necessarily just automatically get duped into thinking the mainstream narrative that mortgage rates down mean that the housing market’s going to boom again. That is definitely not clear, especially in certain parts of the country.

This brings up a concern I have over these Sun Belt housing markets. These housing markets in blue are housing markets with a Reventure app home price forecast score below 50. We can see Tennessee is one of these housing markets. Tennessee has turned from a seller’s Market to a buyer’s Market.

The inventory is spiking, the price cuts are spiking, and it’s just continuing to trend down into a buyer’s Market. If you see that in your area, like in Texas, we can see the home price forecast trending more and more into a buyer’s Market, which is good for you as a buyer.

But it’s also sending you a warning that if we’re already trending into a buyer’s Market due to spiking inventory and price cuts, if the unemployment rate then goes up and spikes by a lot, that could lead to a decline that’s much bigger than what we’re seeing now.

Global Housing Market Trends

Since we mentioned Canada earlier, I want you to check out what’s going on in Canada’s housing market. While it’s our neighbor up north, it’s not necessarily exactly related to what’s happening here in the US. However, I think this is worth seeing. According to a report on Wolf Street, home prices in Canada have actually dropped quite a bit over the last two years.

They’re down by 14% from their peak in September 2021, with the biggest declines taking place in Toronto and Hamilton, where values are down 20%. Interestingly, Vancouver is actually performing better, with prices in Vancouver up year-over-year. This is likely because they didn’t go up as much during the pandemic. Prices in Ottawa are down, while prices in Calgary are way up, possibly due to oil.

If you’re in Canada, you can let me know why you think prices in Calgary are way up. In general, in most parts of Canada, home prices have gone down by around 14-15% from their peak.

Canada seems to be a bit ahead of the US in its housing cycle. Prices have dropped more, the unemployment rate has gone up more, and their Central Bank has decided to cut rates earlier. This could be a window into what’s going to happen in the US over the next 6 to 12 months – maybe higher unemployment rates, home price declines, and eventually, the Fed being forced to cut rates.

Now, let’s look over in Europe.

A report from the UK is showing that home sellers are flooding the property market just as buyers are walking away, with the stock of homes for sale at a three-year high. UK home prices have been falling the most in the last eight months. Experts said that weak supply was partially responsible for the resilient home prices seen last year in 2023. However, now, a boost in listings could have the opposite effect in the UK, when the house price recovery and buyer demand are faltering.

This sounds incredibly familiar to what’s going on in the US housing market. There was a head fake in 2023 of recovery due to a shortage of new listings and lower inventory, which caused prices to start going back up, particularly in certain parts of America. But now, we’re seeing the listings increase in the US, buyer demand stay near 20-30-year lows, and inventory is starting to pile up.

According to realtor.com, active inventory in the US housing market surged up to 788,000 listings in May 2024. This is the highest level of inventory since 2020, 35% higher than last year, and it’s now starting to get to those pre-pandemic levels.

It’s interesting how the world housing market seems to be going in the same general direction. Maybe Canada is a little bit ahead of the US, and maybe the UK is also a little bit ahead of the US, but in general, we saw a 2023 fake recovery in all these countries. Now, we’re seeing prices go down again and inventory spike.

In a market like Denver, 34 out of 100, plummeting into a buyer’s Market. Prices in Denver are now starting to drop and will likely drop more in the future. Look at the monthly home price forecast score month by month, and you can really get a sense of the trends. If you see it dropping like this, it’s a sign that the Market is shifting down.

Conversely, if you look at a place like Chicago, you’ll see that the home price forecast score is actually going up, indicating more of a seller’s Market. Prices in Chicago are stable or going up. If you see the score going down and free-falling like in Tampa, be very careful—prices could be dropping fast.