Weekend Talking Points - 'Merry'

Scott Bradley Brixen
December 12, 2024

After two bumpy years of around 4 million units in existing home sales, the two big questions for 2025 are: 1) will mortgage rates finally follow the Fed Funds Rate lower?, and 2) will they drop enough to get demand (and supply) back to normal?

Jobs growth rebounds. The US added 227K jobs in November, a big rebound after the storm and strike-impacted October report. But the unemployment rate rose from 4.1% to 4.2%. [BLS]

TP: Recall that the US added just 12,000 jobs in October, so a bounceback in November was expected. Overall the bond market seemed to take this report positively, focusing on the higher unemployment number.

Inflation gets stuck. The November CPI report (Consumer Price Index = inflation for you and me) was the last major piece of economic data before the Federal Reserve makes their next interest rate decision on December 18. It wasn’t great news.

Both “headline” and “core” (stripping out food and fuel) CPI rose by 0.3% month-over-month in November, which lifted “headline” annual CPI from +2.6% YoY → 2.7% YoY, while “core” annual CPI was stuck at +3.3% YoY. [BEA]

TP: We’ll get the November PCE number (the Fed’s preferred inflation gauge) on December 20 — after the next Fed meeting. As a reminder, in October, “headline” PCE climbed from +2.1% YoY in September to +2.3% YoY, while “core” PCE rose from +2.7% YoY → +2.8% YoY.

Your breakfast just got more expensive. The latest PPI report (Producer Price Index = inflation for businesses) saw prices rise 0.4% MoM in November versus 0.2% MoM in October. Rising food prices were a big part of the increase, particularly chicken eggs! But that’s not all: the prices for coffee, bacon, and OJ are all up big this year. [BLS]

Consumer sentiment improves. Fannie Mae’s Home Purchase Sentiment index rose for the 4th straight month to 75.0 in November, the highest level since February 22, mainly on mortgage rate optimism (people believe that rates will go down). [FNMA]

Homeowners feeling the wealth effect. In 3Q 2024, the total home equity of all homeowners with a mortgage rose 2.5% YoY to $17.5 trillion. That’s roughly $300,000 in equity per homeowner with a mortgage. [CoreLogic]

Market expecting another 25 bps rate cut on Dec 18. The Fed Funds Rate futures market is currently pricing in a 98% probability of a 25 basis point cut (25 bps = 0.25% = 25/100 of a %) on December 18. That would bring the total amount of cuts in this loosening cycle (so far) to 100 bps (50 + 25 + 25).

Where do the Experts See Home Prices Heading?

At year-end, Fannie Mae collects housing forecasts from 100+ industry experts (including MBS Highway’s CEO, Barry Habib). The consensus? Around +4% price growth in 2024 and 2025, and cumulative price growth of 14–40% between 2025 and 2029. A few thoughts on this:

• 4% annual price growth over 5 years equates to 22% cumulative price growth (it’s a bit higher than just 4% X 5 years because of compounding)
• 40% cumulative price growth (the high end of the Fannie Mae forecast range) implies average annual price growth of 7%.
• 14% cumulative price growth (the low end of the Fannie Mae forecast range) implies ~2.7% average annual price growth.

That’s a big range, right? Look, forecasting 5 years out is difficult. And to be honest, beyond a few years, people are just guessing. But here’s what’s important:

• 4% price growth over the next two years would generate $33,000 in appreciation gains on a $400,000 home. Not bad at all.
• 27% cumulative price growth (the mean of the Fannie Mae forecast range) over the next 5 years would generate $108,000 in appreciation gains on a $400,000 home. Chunky!

Mortgage Market

Since hitting a near-term peak of 7.13% on November 6 (the day after the US Presidential Election), average 30-year mortgage rates have been trending lower, briefly dropping below 6.7% on December 6. This, despite recent jobs (BLS: +227K in November) and inflation (November “headline” CPI rises to +2.7% YoY) data that weren’t exactly helpful for the bond markets.

Here’s what the fed futures market is currently pricing in for future rate cuts. Note that the current Fed Funds Rate policy range (AFTER the 25 bps cut announced on November 7) is 4.50–4.75%.

• Dec 18 FOMC Meeting: 98% probability of another 25 bps cut. (Was 78% last week.) Only a 2% probability that the Fed will stay on hold.
• Jan 29 FOMC Meeting: 75% probability that the Fed will stay on hold. 20% probability of a further 25 bps cut (in which case the policy range would be 4.00–4.25%).

They Said It

“Eventually, mortgage rates will follow the Fed Funds Rate lower. Our forecast for 2025 is for mortgage rates to drop to 5.75% by year-end, with national home prices rising 4% year-over-year.” said Barry Habib, MBS Highway’s Founder and CEO.” — Barry Habib, MBS Highway’s Founder and CEO

The people behind Talking Points will be taking a well-deserved break through year-end, but will be back in January 2025 with views on all the latest real estate news. Thanks for your support and let’s all hope for a more active 2025!

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