The Fed's Christmas present: an interest rate rug pull

Just as most people are turning off work for the end of 2024, the Fed announced their final interest rate decision of the year.

Everyone expected a 0.25% rate cut and the Fed, not wanting to disappoint the markets, lowered the Federal Funds Rate by 0.25%.

How did the market react to the news? Mortgage rates spiked higher and the stock market dropped significantly.

This isn't because of the actual rate cut, but is a result of the Fed's guidance to investors on what to expect in 2025.

We've gone from anticipating 6 Fed rate cuts to being told we'll be lucky if we get 1 or 2 cuts in 2025. 

Since the meeting, stocks and rates have recovered a tiny bit, but there are several trends worth highlighting that will impact real estate professionals, home buyers, homeowners, and renters going into 2025.

Impacting the Fed's rate cuts: jobs and prices

Before we get to the trends, let's go over the Fed's main priorities. 

In case you didn't know, the Fed has what's called a "dual mandate."

They're supposed to 1) maintain maximum employment and 2) keep prices steady.

The Fed primarily looks at the unemployment rate, new jobs created, and the number of job openings to see how they're doing on employment.

As for prices, the Federal Reserve favors the Personal Consumption Expenditures (PCE) report to see how the inflation rate is changing. They also use the Consumer Price Index (CPI) and Producer Price Index (PPI) as secondary ways to track price changes.

The Atlanta Fed publishes a dashboard with all the different way they measure inflation if you really want to geek out.

And both these topics matter significantly to the housing market.

Employment is critical when you're getting a mortgage and considering making a large purchase. 

If you are worried about losing your job or if a lot of people are getting laid off, home sales will fall and vice versa.

Inflation affects 30-year mortgage rates and the 10-year treasury yield.

Higher inflation means higher interest rates and fewer real estate sales.

Now, let's looks at the current trends taking place...

Trend 1: The economy (probably) is slowing down

You can't tell when looking at the GDP because It's indicating strong growth, but a cooling labor market (among other parts of our economy) shows that we're coming back down to earth and growth is slowing down.

Currently, a combo of AI innovation and consumers spending like there's no tomorrow is driving our economy. 

I like the AI strength, but not so much the credit card binging that's going on.

The key here is that we're not at recession levels (yet), but it's harder to find a job in most cases and companies are making cuts.

This is especially true for the real estate industry as we've been in a real estate recession for the last 2 years.

Closed sales are down in most areas and companies that ramped up in 2021 and 2022 are having to cut staff and expenses to stay profitable. 

Jerome Powell echoed this in his commentary and it's part of the reason they've cut rates at all even though inflation isn't where the Fed wants it.

The idea is to proactively cut rates to avoid a recession.

Trend 2: Inflation isn't going away

The Fed pushed inflation up all the way to 9% (based on the CPI) in October 2022 after increasing the money supply by a whopping 40% from 2020-2021.

Since then, they've slowed down the printing presses and inflation has declined to 2-4% depending on how you measure it. 

Prior to the latest Fed meeting, the financial "experts" had pretty much written inflation off as an issue of the past.

We saw steady declines in inflation until it flatlined in July of this year and we haven't mad any further progress since then.

Inflation formally came back to the main stage in the December Fed press conference. 

Jerome Powell said that inflation is just as much of a concern as a slowing economy at this point and they were going to step back and see what happens instead of continuing to cut rates in 2025.

After investors expected 6 Fed rate cuts in 2025 mortgage rates dipped into the 5's.

We've now reversed course and are approaching 7% again with rate cuts essentially off the table.

Finding Opportunity: Rate surprises & local market differences

These market trends have some pretty significant implications for real estate professionals and those looking to buy or sell real estate in the future.

I think this is setting up for a couple surprises in the next year or two.

First, I think our economy is vulnerable to a shock as rates remain higher and debts (government and commercial loans) are rolling over from lower rates to higher rates. 

This would have varying impacts on local markets as certain economies would be weaker and others more resilient.

For example, here's what Toll Brothers CEO, Douglas Yearly, said when asked about softness in real estate markets:

“And then the one I am saving for last is Florida. The good news in Florida is Jacksonville has been very strong, but the other markets in Florida have seen some elevated inventory levels. They also had significant price increases through COVID that outpaced the company – excuse me, the country's average, and therefore there's a bit more of an affordability issue down there because prices are up and so we're keeping an eye on Florida. The winter season is just beginning as the snowbirds are arriving, but that's probably our most cautionary market in the country.”  

He also talked about Austin, San Antonio, and the Texas market before Florida.

You've got to be tuned into your local market so that you don't get thrown off by broader headlines.

Second, it's hard for me to see a world where Donald Trump bucks the trend and lets the market take its course lower.

I expect him to do what every other politician has done and kick the can down the road.

If the economy runs into issues, I'd expect the Fed to slash rates, start up quantitative easing, and try to give the economic engine some gas.

This would be a huge opportunity in the short-term for everyone to make the move they want to make while rates are lower. 

Because after the honeymoon, the inflation genie is out of the bottle and we'll be dealing with higher rates all over again.

Remember, nobody knows the future, but we can prepare for different outcomes.

There's plenty of opportunity ahead for those looking for it!

Dr. Alex Stewart
Founder