One significant driver of improvements in real estate values is a reduction in interest rates. Interest rates, primarily influenced by inflation and the Federal Reserve’s policies, along with the supply and demand dynamics of bonds in the market, play a crucial role.

The Fed wields considerable influence over the production of financial instruments like bonds. To understand its actions better, let’s consider the first step: expectations regarding a potential Fed rate cut. The Fed’s target inflation rate is 2% on core Personal Consumption Expenditures (PCE), a key metric that excludes volatile food and energy prices. Hitting that 2% target is easier said than done.

While there are various measures of inflation, such as the Consumer Price Index (CPI), the Fed primarily focuses on the PCE. By concentrating on the core PCE, which removes the volatile components, the Fed aims to target areas where its monetary policy can have a meaningful impact. It’s important to note that the Fed acknowledges its inability to control factors such as food and energy prices, which can be influenced by external events like weather conditions or geopolitical decisions. Therefore, by focusing on the core PCE, the Fed aims to concentrate its efforts where it can make a difference.

Assuming a projected monthly inflation rate of 2.7%, it’s possible that reaching the 2% target may be challenging in the near term. Even if inflation moderates, achieving the desired target by the end of the year seems uncertain. Given the possibility of falling short of the 2% target, combined with indications of an impending economic slowdown, it’s likely that the Fed will consider rate cuts before reaching the target inflation rate. The timing of these rate cuts will depend on various factors, including economic data and Fed meetings. While a rate cut in January and March did not happen, a subsequent meeting in June may be more realistic for a rate adjustment. An anticipated rate cut will have a positive affect for interest rates, which could benefit the economy.

When central banks lowered interest rates to zero, they shied away from implementing negative interest rate policies. Instead, they adopted a strategy known as quantitative easing (QE) to further reduce interest rates without pushing them into negative territory. Quantitative easing operates on the principle of supply and demand. By purchasing large quantities of treasury bonds and mortgage-backed securities, central banks effectively reduce the available supply in the market. With fewer securities available for purchase, buyers must compete and bid higher prices, consequently driving down yields.

The combination of reduced supply in the market and potential Fed actions suggests a favorable outlook for interest rates, including mortgage rates. While it may not return to historically low levels, there is optimism for a significant decline, which could benefit borrowers and increase opportunities for real estate investors across all sectors of the housing market.