My 2024 Interest Rates Forecast
My opinion of the 2024 interest rate trend can best be described in one word.
Uncertainty.
The Fed's desire is to keep the monetary policy neutral, neither restrictive nor encouraging, which means a long-term Fed interest rate between 2-3% (or about the same as the inflation rate, from what I understand). We are at 5.25%-5.5%. So, with the inflation coming down to 3.4% from 9.1% in June 2022, I certainly understand the Fed's intent to cut rates.
But are the conditions there for rate cuts in 2024?
Nobody seems to know. With the latest GDP growth data at an annual rate of 4.9% in Q3 2023 and the unemployment rate remaining low and stable., the Fed does not need to cut rates to stimulate the economy or to fulfill one of their mandates of full employment. On the contrary, aggressive rate cuts might overheat the economy and increase inflation again.
Speaking of inflation, we are still not out of the woods. December's CPI numbers were higher than projected. The core CPI, which the Fed likes to use, was 3.9%, a long way to go to reach the Fed's long-term 2% range. Much of the inflation was due to core services. Note that Shelter (housing), which accounts for about 34% of the CPI, rose 6.2% YoY in December. Premature rate cuts certainly run the risk of racking up inflation.
So to me, there isn't a clear direction at this time to which the interest rates are compelled to move. I expect 2024 to be a muddle-through year for interest rates, i.e. sticky (to where they are today) and will only move (up or down) if there are occasions significant enough. Even if they do move, I don't expect them to be significant based on what I can see now (no more than 1% changes in either direction).
One thing is clear to me, though.
If the mortgage rates drop, property prices will rise, at least in Las Vegas. Inventory has been suppressed to ultra-low levels, and there are a lot of buyers pent up by the high interest rates. Even today, good properties priced attractively get snatched up in 1-3 days with multiple offers. So if the mortgage rates drop, there will be a lot more buyers going after the meager supply, and the results will be rapid price increases.
My advice for purchasing an investment property in 2024 with financing is not to tie your decision to when the mortgage rates might drop. Set a target interest rate (for example, 6.25%, 6.5%) and budget for rate buy down to obtain that interest rate. The fluctuation of the mortgage rates becomes the mere fluctuation of your rate buy down cost. When you find a good property with acceptable returns based on your target interest rate, take action and secure it. We expect prices to rise in 2024 (more about that in our upcoming 2024 investor outlook) so waiting will cost you more to secure the same property.
If you have a different view of the interest rate trend in 2024, I would love to hear about it.
