Federal Reserve keeps interest rates are current levels. What it means for California homeowners

There’s new hope that mortgage rates will stabilize and even drop next year.

The Federal Reserve Wednesday kept its key interest rates where they’ve been since the summer, and indicated three rate cuts could come next year.

The decision to keep rates stable Wednesday will be seen as an important signal that the economy is steady and even improving, said Jacob Channel, senior economist at LendingTree, an online lending marketplace.

While there’s no guarantee, he predicted rates for a 30-year fixed rate mortgage loan could fall to between 6% and 6.5% by the end of next year. The average nationally was down to 7.03% last week, according to Freddie Mac, which tracks mortgage interest rates.

That was down from 7.22% the previous week and 7.79% in late October, though still well above the 6.48% at the start of 2023.

The housing market in California and elsewhere could use the boost. Sales statewide dropped slightly in October from September and were down 11.9% from a year earlier.

But Jennifer Branchini, a Bay area Realtor and president of the California Association of Realtors, saw potential for better times.

“Despite rates remaining elevated, many other factors have swung in favor of buyers recently including more properties staying on the market longer before selling and fewer homes selling over list price, which could motivate more sellers to offer concessions,” she said in a statement.

How much does a house cost?

California’s statewide median price of an existing single-family home dipped slightly in October from a month earlier, to $840,360.

There were regional differences. In Sacramento County that month, the median price was $550,000, up 0.9% from the previous month.

Other October prices compared to September: Fresno, $410,000, unchanged; Merced, $392,750, up 2.1%; Placer, $685,000, up 3%; Stanislaus, $460,000, down 2%; Tulare, $358,500, down 6.9% and San Luis Obispo, $887,620, unchanged.

The Realtors group was cautiously optimistic.

“If inflation continues to cool, we could see more improvement in mortgage rates than the Fed is currently projecting for next year, which would alleviate some pressure on both the buy and sell sides of the housing market in 2024,” said Jordan Levine, the Realtors’ senior vice president and chief economist.

The Fed has raised its target interest rate 11 times since March 2022, in an effort to bring down the rate of inflation to 2%. The current rate of 5.25% to 5.5% is its highest in 22 years.

It hasn’t reached its inflation goal, but there’s been progress, and most projections see the rate of inflation continuing to ease.

The UCLA Anderson forecast for California released last week predicted prices in the state will rise an average of 3.2% next year and 2.8% in 2025.

Tuesday, the federal Bureau of Labor Statistics reported that nationally, prices were up 3.1% in the 12 months that ended in November, down from their 9.1% peak in summer 2022 and 3.2% on an annual basis last month.

Such news, along with other calm economic indicators, could help restrain the Fed from any more increases.

That’s important, because “The Fed’s decisions tend to have a ripple effect that impacts the entire economy,” Channel said.

The Fed was circumspect Wednesday, saying in a statement it remained “strongly committed to returning inflation to its 2% objective.”

The future of mortgage interest

A rate increase “can have a much broader impact in the form of reduced consumer demand or a weakening of bond investor confidence. A rate cut, or even a decision to hold rates steady, can have a similarly profound impact on the economy,” Channel said.

Just why all this affects mortgage rates is complicated, involving how bond markets are calmed and it becomes less risky to invest in bonds with lower yields. As those yields drop, usually mortgage loan rates do as well, since in the end such loans compete with Treasury bonds for investors, Channel explained.

“Because the exact reasons behind why mortgage rates might move in a given direction are numerous and complex and because mortgage rates tend to fluctuate on a week-to-week basis, it can be tough to nail down exactly what mortgage rates will do and why they’ll do it,” he said.

But look at how rates have already fallen. “I think the Fed skipping a hike at their meeting this week is unlikely to make things worse,” Channel said.