Interest Rate Cuts and Stimulating Residential Activity
The Federal Reserve came out aggressively in September with a half-point rate cut, and new Fed dot plot expectations show as many as two more quarter-point cuts could be possible before the end of the year. The longer-term expectations for the Fed include another full point cut in 2025 and the Effective Fed Funds Rate hitting its target levels of 2.9% sometime early in 2026.
Mortgage rates are more closely correlated with the long-term US Treasury, which has been falling of late. Mortgage rates at a national average level have fallen from their 2024 peak of 7.22% in May to 6.09% today. In normal economic cycles, interest policy from the Federal Reserve is typically influential on what happens in the bond market. When the Fed is trimming interest rates, Treasury rates also typically follow. Therefore, it can be assumed that interest rate cuts this month and later in 2024 will help further ease mortgage rates.
As interest rates have fallen, the most immediate consumer response has been in the mortgage refinance market. Refinancing activity surged by 35% between the week of August 7th and August 14th and increased once again by 20% week-over-week in early September. They are currently 94% higher than volumes from a year ago.
New mortgage applications were 3% higher based on early September data, but largely it is thought that it takes longer for decelerating interest rates to translate into new home construction activity (based on higher consumer demand). If the Fed continues on this pace to trim rates by nearly a full point between now and the end of the year, that should spur some early 2025 new mortgage activity as consumers anticipate even further cuts next year.
Source: Mortgage Refinance Index; Mortgage Bankers Association
Hurricane Activity Picks Up Pace in Late September
Forecasters were predicting that the 2024 hurricane season could have been one of the worst on record. Conditions were shaping up late in the hurricane season that can fuel strong hurricanes and remove many of the conditions that had prevented strong storms from forming over the past 2-3 years. At the time of writing, Hurricane Helene was barreling down on the US and conditions in the Gulf were expected to make it a strong hurricane capable of reaching Category 3 strength. This could be a signal of a new hurricane pattern forming late in the season; and later than expected. Here is a little background on the mechanisms affecting storm formation this year.
A strong El Nino pattern over the past three years has given way to a neutral condition earlier this year and then it transitioned into La Nina. Historically, El Nino cycles typically create heavy upper-level wind shear in the Gulf of Mexico and Caribbean which can rip the tops out of hurricanes or push them out into the Central Atlantic as we have seen over the past few years.
With La Nina in place, those upper level winds dissipate, and storms can come further inland and retain their strength. Further, Atlantic and Gulf waters remain extremely warm, which provides significant fuel for storms once they have formed.
This year was supposed to bring more major hurricanes and more US landfalls than in prior years, but there was a factor that helped kill storm formation. Saharan Dust Storms were unusually strong this year, extending across the Atlantic and even as far inland as Texas, Oklahoma, and parts of the Midwest. Dust storms help prevent storm formation and that has been the case for much of the year.
But those dust storms have dissipated, and the conditions that were holding back storm formation have eased. That has allowed these waves of storms forming in the southern Atlantic regions to start. Forecasters are still expecting some strong storms to form and make landfall late in this hurricane season. The US will be watching Helene closely, the storm was 400 miles wide and was expected to deliver significant flooding far inland after making landfall. The insurance sector is certainly on full watch with this storm and others that might follow yet this season.
