Fannie Mae Predicts More Fed Cuts Soon

Fannie Mae economists are forecasting two more quarter-point interest rate cuts by the Federal Reserve this year, expecting that the Fed will move to cut rates in September and again in December. That could bode well for lowering mortgage rates for the remainder of the year. Even though the Fed’s short-term interest rate does not have a direct effect on mortgage rates, it does tend to influence them.

Consumer demand for housing remains strong, Fannie Mae’s Economic and Strategic Research Group notes in a recent report. However, limited inventory—notably at the affordable end—is inhibiting growth in the single-family housing market, the report notes.

Fannie Mae’s Home Purchase Sentiment Index surged to a record high in July as home buyers showed stronger interest in the real estate market. But even as mortgage rates near record lows, the limited availability of homes for sale is constraining growth, researchers note.

“Though the current expansion recently became the longest on record, reverberating trade tensions and general economic uncertainty continue to weigh on growth,” says Doug Duncan, Fannie Mae’s senior vice president and chief economist. “The persistent trade tensions between the U.S. and China threaten to further reduce business investment, disrupt equity markets, degrade household wealth, and diminish consumer spending, the country’s primary economic engine of late. To help shield financial markets, buoy consumers, and perhaps nudge inflation slightly higher, we now expect the Fed will cut interest rates by 25 basis points two more times in 2019, up from our previous prediction of one.”

Mortgage rates will likely respond if the Fed acts. Mortgage rates are currently near the lowest level in recent decades, Duncan notes. The 30-year fixed-rate mortgage averaged 3.60% last week, according to Freddie Mac. More homeowners are finding incentive to refinance.

“We estimate that 35 percent of outstanding mortgages are now ‘in the money,’ meaning borrowers may realize significant cost savings by refinancing; as such, we expect the share of refinance originations to grow through the remainder of the year,” Duncan says. “However, while existing homeowners may be able to enjoy the benefits of lower interest rates, many would-be homeowners, and the purchase mortgage market generally, remain unable to capitalize on the favorable rate environment due to the chronically limited supply of homes available for sale.”