Interest Rate Cuts and Stimulating Residential Activity
The Federal Reserve has signaled that it would likely begin to trim interest rates in September with at least a quarter-point cut perhaps followed up with another quarter-point rate cut in December. Analysts are watching carefully to understand when this might trigger consumer purchases of homes.
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 6.35% 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 in September will help further ease mortgage rates.
As interest rates have fallen, the most immediate consumer response has been in the refinance market. Refinancing activity surged by 35% between the week of August 7th and August 14th. 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 trims rates by 50 basis points between now and the end of the year, that should spur some early 2025 activity as consumers anticipate further cuts next year.
Source: Mortgage Refinance Index; Mortgage Bankers Association
Hurricane Activity Surprisingly Weaker YTD; But Much Still to Come
Forecasters were predicting that the 2024 hurricane season could have been one of the worst on record. Conditions were shaping up that would fuel strong hurricanes and remove many of the conditions that had prevented strong storms from forming over the past 2-3 years.
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 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 is not yet out of the woods, and the insurance sector is still on full watch.
