Buy Now or Wait for Rates to Drop.

CLIENT ADVICE
Should We Wait For September?

🔮 The most-asked question in the last 2 ½ years. “When do you think rates are coming down?”

🍹 My frequent answer has been, “If I knew that, I would be on a beach somewhere with a fruity drink in my hand.”

It usually gets a laugh and snaps everyone back to the reality that “I don’t know either!” But now, we have hope. We have the wind blowing in our direction.

Let’s discuss why rates are so high, what factors we have in our favor, when we think the rates will drop, and what we need to look for.

The September Fed meeting is the 17th-18th. So expect a press conference on Friday, September 19th, 2024.

Why Rates Went Up

📈 The Fed Funds Rate vs. Mortgage Rates:

First, it's essential to understand that the Federal Reserve's funds rate and mortgage rates are not the same. The Fed funds rate is the interest rate at which banks lend to each other overnight. It directly impacts short-term rates and indirectly affects long-term rates, including mortgages. When the Fed raises the funds rate, it makes borrowing more expensive, which can influence mortgage rates, but many other factors are at play.

📉 Inflation Reports:

Recent inflation has been a significant driver of higher interest rates. Over the past couple of years, we've seen inflation rates reaching levels not observed in decades. The Consumer Price Index (CPI) and the Personal Consumption Expenditures (PCE) price index, key measures of inflation, have consistently shown higher prices across the board, from groceries to gasoline.

💼 Fed's Rationale:

To combat this inflation, the Federal Reserve raises interest rates. Higher rates make borrowing more expensive, which can reduce consumer spending and business investments. This, in turn, helps to slow down the economy and ease inflationary pressures. By making money more costly to borrow, the Fed aims to cool off the demand for goods and services, thereby stabilizing prices.

💼 Unemployment Reports:

Low unemployment rates have also played a role. While low unemployment is generally good news, it can contribute to inflation. When more people are employed, they have more money to spend, which can drive prices up. Recent reports have shown a tight labor market, with unemployment rates at historically low levels. This situation pressures the Fed to maintain higher interest rates to prevent the economy from overheating.

Why Rates May Drop in September 2024

🌬️ Economic Pressures:

Several economic indicators suggest that the Fed may be ready to lower rates. Recent data shows signs of cooling inflation, with both the CPI and PCE showing slower price increases. Additionally, while the job market remains strong, there are hints of softening, with some sectors reporting slower job growth and increased layoffs.

🔍 Market Expectations:

Financial markets have been anticipating a rate cut, which often gets "baked in" to current interest rates. This means that investors are already adjusting their portfolios in expectation of the Fed’s actions. If the rate cut happens as expected, mortgage rates might not drop significantly overnight because the market has already adjusted in anticipation.

👀 What to Watch For:

As we approach September, keep an eye on the following:

• Upcoming Inflation Reports: Continued cooling in inflation could bolster the case for a rate cut.

• Employment Data: Any significant changes in unemployment rates or job growth could influence the Fed's decision.

• Fed Announcements: Pay attention to statements from Fed officials, which often give clues about future policy moves.

• Media Coverage: When mainstream media starts widely reporting on the upcoming rate cuts, this will likely trigger consumers who have been waiting to purchase a home to enter the market. This can start a cycle of competition that could escalate quickly, potentially leading to higher home prices.

The anticipated rate cut in September 2024 could provide some relief, but it's crucial to stay informed and watch how these factors play out in the coming months.

What to Do

💡 Buy the House if You Can Afford the Payment:

Why wait for the competition to increase? If you can afford the payment now, it makes sense to buy the house rather than risk losing out. Here’s why:

• Avoid Future Competition: Waiting for rates to drop could mean entering a more competitive market, potentially leading to bidding wars and higher home prices.

• Price Increases: Home prices could rise while you wait, negating any savings from a slightly lower interest rate.

• Rent Costs: Paying rent in the interim can be expensive, and it doesn’t build equity.

• Negotiation Leverage: In a less competitive market, you might have more leverage to negotiate seller concessions.

• Refinancing Options: If rates do drop in the future, you always have the option to refinance your mortgage to a lower rate.

Making a decision based on your current affordability can save you stress and potentially money in the long run. Remember, the best time to buy is when you find the right house that fits your budget and needs.