The Federal Reserve kicked off its new easing cycle with a notable 50-basis-point rate cut announced last Wednesday.

Builder confidence shows improvement. The NAHB’s confidence index for builders increased by 2 points in September, reaching 41, driven by a 4-point rise in future sales expectations to 53. While the overall sentiment remains bearish (with anything below 50 signaling pessimism), there’s growing optimism that falling mortgage rates could boost future sales.

Retail sales were steady. Since consumer spending accounts for two-thirds of the U.S. GDP, trends in retail sales are crucial. In August, retail sales inched up by 0.1% month-over-month, slightly exceeding expectations.

The Fed’s first move was a 50-basis-point cut. On Wednesday, the central bank lowered its policy rate by 50 bps, moving the range from 5.25–5.50% down to 4.75–5.00%. During a press conference, Fed Chair Jerome Powell emphasized the strength of the economy, low unemployment, and the Fed’s readiness to act—leaving some questioning the need for such a large cut if the economy is doing well.

Fed projections: At every other meeting, Fed members forecast metrics like GDP, unemployment, and the Fed Funds Rate. Currently, they anticipate another 50 bps in rate cuts by the end of 2024, with a further 100 bps cut throughout 2025.

Positive signs for new construction. In August, new home permits increased by 5% month-over-month, starts were up 10%, and completions rose 9%. Multi-family housing units, built at record levels during the pandemic, are being delivered at a pace unseen since 1975, especially in the South, which could pressure rental prices in areas like Texas and Florida.

Lower rates haven’t boosted existing home sales yet. In August, sales of existing homes dropped 2.5% month-over-month, reaching an annualized rate of 3.86 million units—the lowest since October 2023 when mortgage rates peaked over 8%.

Why aren’t lower mortgage rates driving demand? First, existing home sales reflect contracts signed over a month ago when rates were higher. Second, buyers may take time to find and close on a home, even as rates drop. Third, high home prices continue to hinder affordability.

Realtors remain cautiously optimistic. While competitive intensity has declined from last year (fewer homes selling above list price and fewer offers per home), realtors expect a rise in buying activity over the next three months, driven by lower mortgage rates.

Why did mortgage rates rise despite the Fed’s cut? While the Fed influences mortgage rates, the latter are set by market forces, including Treasury yields, mortgage-backed securities, and lender competition. Mortgage rates often adjust before the Fed announces rate cuts, as the bond market anticipates these moves. Even though mortgage rates fell significantly leading up to the Fed’s decision, markets had already priced in the expected cut, leading to little immediate impact. The 50-bps cut is just the start of a process that could lower rates by another 150 bps through the end of 2025.

Mortgage Market Outlook: After the recent 50 bps cut, the Fed Funds Rate is now at 4.75–5.00%. Looking ahead to future FOMC meetings:

-Nov 5: Presidential election
– Nov 7: There’s a 58% chance of a 25-bps cut and a 42% chance of a 50-bps cut.
– Dec 18: There’s a 49% chance that rates will be 75 bps lower than current levels.