What an exceptional conclusion to the year for interest rates, as a reassuring outlook for 2024 emerges.

During its meeting on December 12-13, the Federal Reserve's Federal Open Market Committee presented a forward-looking perspective indicating three rate cuts in 2024, amounting to a cumulative reduction of 0.75% in the federal funds rate. This reduction aims to bring the federal funds rate down to 4.6%, a significant drop from the existing range of 5.25% to 5.5%.

With the anticipated 0.75% cumulative reduction in 2024, there's a possibility that the 30-year fixed mortgage rate could reach 5.25% by the end of the year, averaging at 6% for the entire year.

This decline in mortgage rates has the potential to stimulate home sales by approximately 7%, drawing insights from the historical response of home sales to changes in mortgage rates over the past two years.

In the September meeting, the Fed participants initially foresaw a more modest rate cut of 0.25%. However, the updated, more assertive rate cut schedule suggests that the Fed participants believe the inflation target of 2% can be achieved without the need for further rate hikes. The impact of prior rate increases seems to be achieving the desired effect of curbing inflation, with November 2023 figures showing a drop to 3.1% from 9.1% in June 2022.

The financial markets welcomed the anticipated rate cuts with enthusiasm, evident in the 30-year fixed mortgage rate falling to 6.95% during the week of December 14. This marked the first time since August that the rate had dipped below 7%.

Before factoring in the expected 0.75% reduction, the initial projection for the 30-year fixed mortgage rate by the end of 2024 was 5.75%. Now, with the anticipated reduction, the rate could potentially reach 5.25% by the end of the year, with a yearly average of 6%. This adjustment is substantiated by the immediate pricing of the Fed's 2024 anticipated rate hikes into the financial market. As of December 14, the 10-year Treasury Note rate, a benchmark for the 30-year rate, dropped to 3.9%, down from 4.2% the previous day, suggesting that the bond market factored in at least one rate reduction.

By the close of 2024, the 10-year Treasury Note might further decrease to 3.4%, incorporating the additional two anticipated rate reductions of 0.5%. Considering the historical spread of 1.7% between the 30-year fixed mortgage rate and the 10-year Note from 2018-2019, it is plausible that the 30-year fixed-rate mortgage could hover around 5.25% by the fourth quarter of 2024.

The potential reduction in mortgage rates to an average of 6% could spur home sales by an estimated 7%, building on the observed response of home sales to mortgage rate fluctuations in the preceding two years.

During the housing downturn from 2021 to 2023, where the 30-year fixed mortgage rate increased by 3.85 percentage points (from 2.96% in 2021 to 6.81% in 2023), existing home sales fell nationally by 33%. In the Southeast Florida counties, a comparable decline of approximately 32% was noted in total home sales from January-October 2023. Therefore, a reduction in mortgage rates from an average of 6.81% to 6% has the potential to bolster home sales by about 7%, calculated by applying the historical trend of a 9% decrease for every one percentage point increase in mortgage rates.