As evidenced this past week, an uncertain Federal Reserve is never good for markets. Stocks tumbled on Wednesday following what’s been called a “hawkish cut.” Even though the Fed lowered the Fed Funds rate by a quarter point, the Chairman’s comments disappointed markets. Despite a strong stock market, sticky inflation, improved post-election consumer confidence, and historically tight credit spreads, the Chairman signaled only two rate cuts on the horizon for 2025.
We believe the recent rate cut was unnecessary, and waiting would have likely prevented the sharp sell-off in bonds. Ironically, the two sectors most sensitive to interest rates: real estate, corporations, and auto loans, are being hurt by the rise in long-term rates. Despite the lower Fed Funds rate (now at 4.375%), the 10-year Treasury has climbed above 4.5%, up nearly 80 basis points since the initial cuts, driving borrowing costs higher across the board.
Housing inventory appears to be slowly rising as elevated home prices and high borrowing costs deter buyers. Over time, we expect this to shift. Many clients are contacting Insignia Mortgage for help refinancing jumbo ARMs taken out five to seven years ago, as payment adjustments are in some cases doubling monthly payments. We anticipate this trend will gradually increase inventory and may help ease home prices in expensive coastal cities.
While liquidity in the banking sector remains tight, larger private banks are keeping mortgage spreads narrow, benefiting affluent borrowers looking to purchase homes. Unfortunately, average borrowers are feeling the squeeze, which could further strain the broader housing market.
Our primary concern is that the incoming administration’s pro-growth strategy, while positive for the economy, risks reigniting inflation. These concerns were somewhat tempered today when the PCE came in better than expected. However, many economic models have inflation increasing again in early 2025. We recommend keeping a close watch on the 2-year Treasury and oil prices as important indicators of where the rates may head. If rates rise beyond expectations, commercial real estate could face significant stress in 2025. However, the persistent housing supply shortage makes predicting housing price declines challenging.