January 7, 2025 – What’s With The Fed?
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Economic Commentary
A lot of interest rate watchers were very confused late last year. As was expected, in their last meeting of the year, the Federal Reserve Open Market Committee lowered rates for the third time in 2024. But interest rates such as mortgages reacted instantly by increasing. How can that be? Doesn’t the Fed control interest rates? Not as directly as you might think – and here is why. When the Fed lowers or raises interest rates, they are really changing the level of short-term interest rates. How short-term?
The Federal Fund rate is the rate that banks charge each other for overnight loans, hence the term “overnight lending rate.” You see, banks have money going in and out every hour and at the end of the day they must keep up their reserve requirements. Overnight is very short-term. When the Fed raises short-term rates, it costs the banks more to borrow and they must raise their rates such as the prime rate to customers in order to continue to make money. But long-term rates are based upon expectations for inflation.
The higher inflation is—the less today’s money is worth in the future — and anyone who lends money must charge higher interest to make a profit in lending in this scenario. The Fed raised rates because inflation was high, and they wanted to bring down inflation. Mortgage rates went up not because the Fed raised their rates, but because of the same inflation threat. Likewise, though the Fed lowered their Federal Funds rates last year, the strong economy has the markets feeling that the inflation battle is not won and there likely will be fewer rate decreases next year as a result. Are the markets right? We will see.
Weekly Interest Rate Overview
The Markets. According to Freddie Mac, we continued to see higher mortgage rates last week, though they were fairly stable through the holiday period. 30-year fixed rates increased to 6.91% from 6.85% the week before. In addition, 15-year loans rose to 6.13%. A year ago, 30-year fixed rates averaged 6.62%, over .25% lower than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “Inching up to just shy of seven percent, mortgage rates reached their highest point in nearly six months. Compared to this time last year, rates are elevated and the market’s affordability headwinds persist. However, buyers appear to be more inclined to get off the sidelines as pending home sales rise.” Note: Rates indicated do not include fees and points and are provided for evidence of trends only. They should not be used for comparison purposes.
Real Estate News
Less than half (46.7%) of U.S. renters feel a sense of belonging in their neighborhood, compared with almost two-thirds (63.6%) of homeowners, according to a recent survey commissioned by Redfin. The survey findings in this report are from a Redfin-commissioned survey conducted by Ipsos late in 2024. Just 38.9% of renters feel they have things in common with their neighbors, compared with 58.5% of homeowners. And renters are more likely to avoid neighbors; 41.6% try to avoid interacting with their neighbors, versus 33.1% of homeowners. “When someone buys a home, they’re making an investment in a property and a neighborhood, which means they’ll probably see their neighbors for years to come. Many homeowners seek out positive relationships with their neighbors as a result,” said Redfin Chief Economist Daryl Fairweather. “Renters, on the other hand, tend to stay in their homes for a shorter amount of time, which means they’re often less inclined to get to know the neighbors.” Homeowners are often putting down roots, thinking about things like where they want their kids to grow up. Renters tend to be more transient, meaning they may put less energy into finding somewhere they “belong” because they won’t be there for long. Less than half (47.6%) of respondents who have lived in their current home for under a year feel a sense of belonging in their neighborhood, compared with 58.1% of respondents who have lived in their home for 6-10 years. Source: Redfin
New data from the U.S. Census Bureau shows just how much life in America changed during the pandemic. From family life to housing trends, a lot has changed over the last four years. Data shows fewer grandparents lived with and cared for grandchildren in the early 2020s compared to the late 2010s. The pandemic also reshaped early education. Fewer young children are going to preschool, and more families have opted to start homeschooling, forcing more schools to close. Additionally, Americans stayed put. Rising home values and limited housing options meant fewer people moved. In fact, the median home value jumped over 20% nationwide. These shifts highlight how the pandemic left a lasting impact on families, education, and housing across the country. Source: The Associated Press
A job change, which is typically a primary impetus for moving, is becoming less of a motivating factor for people to relocate—even as some companies call for employees to return to the office. Recent home buyers say they were more motivated to move to be closer to friends and family or to find greater affordability, according to the National Association of REALTORS®’ newly released 2024 Migration Trends report. “Being closer to family and friends has been growing in importance among home buyers since the onset of the pandemic,” says Matt Christopherson, the lead author of the report and NAR’s director of business and consumer research. “Perhaps the pandemic put things into perspective and buyers are prioritizing family more, but added mobility from remote work also allows this to occur.” The South is drawing a large portion of relocating buyers, with the Carolinas, Florida and Texas being the “big winners,” NAR’s report says. “Given the lack of affordability in today’s market, it’s no shock Americans are flocking to Southern states for more affordable housing options and getting more home for their money,” Christopherson says. Further, “Texas and Florida have both seen more than 10% increases in job gains since the arrival of the COVID pandemic. With more affordable housing, lower taxes and strong job markets, Florida and Texas are highly desirable to America’s home buyers.” People moving to the South and West are most likely coming from a different state while relocations in the Northeast are most likely to be people moving within the same state, NAR’s study finds. Source: NAR