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January 2024 » thefivestar.com 33 January 2024 C O V E R S T O R Y mortgage rates will probably be closer to the 6.5%-6% range than where they're currently at. I don't think that lower rates are necessarily guaranteed, but I think, broadly speaking, the rate picture in 2024 will prob- ably be better than the rate picture in 2023. Another very important caveat: even if the overall rate picture is better than 2022 or 2023, that doesn't mean that it's going to be as nice as it was in 2020 or 2021 when rates were at or near record lows. I do think that lower rates will make the housing market a bit friendlier for not just buyers but sellers as well. Most who own their home right now have a rate under 5%, and while it's not ideal to sell your house and move from a 5% rate to a 6.5% rate, it's certainly a much easier pill to swallow, if you have to, than moving from a 5% rate to an 8% rate, which you might have had to do had you sold in 2023. Overall, I think there will be improve- ments in the overall housing market, but because rates are not going to return to record lows, housing will still be expensive owing to relatively high, albeit lower, rates. Q: Is there anything you could foresee that could change that forecast on rates significantly? Channel: I can think of a few things that may change my forecast. Generally, it's probably the broader stuff. For example, more likely than a meteor crashing in Manhattan, an escalation of conflicts in the Middle East could potentially drive gas and oil prices up and put upward pressure on inflation. Maybe if inflation does start to rise more consistently over the coming months, the Fed will change its tune about upcoming cuts, markets will generally be a little bit more fearful about what the fu- ture holds, and that could continue to put upward pressure on mortgage rates. The other big thing to keep in mind, too, is that mortgage rates, especially if you are looking at them on a week-to- week basis, are volatile, and they have been that way for a while now. It's worth pointing out that rates have also been more extreme in their movements than people might have initially anticipated at the start of 2022, for example. I still think that the overall rate picture will be a little bit nicer in 2024. However, I wouldn't bet the farm that mortgage rates are necessarily going to rise or fall all that dramatically over the next 12 months. Instead of making bets, you've got to be willing to ride waves as they come and go with the flow. Q: What are you foreseeing in 2024 in terms of inflation? Channel: The good news is that inflation should continue to cool down. Now, cooling inflation does not neces- sarily mean that prices will drop. When we talk about inflation in this context, we're saying the growth rate of inflation is getting smaller and smaller, which is a good thing. However, cooling inflation growth is not the same thing as deflation, or prices outright falling. People might think, "Oh, that sounds nice, prices will go down," but deflation usually brings with it a lot of problems on its own, and that's another rant for another day. I do think that inflation growth will continue to moderate over the coming months. It's been doing better over the past several months, which is a big reason why the Fed has not announced a rate hike since last summer. I don't think inflation is going to go back down to the Fed's target, which is 2% annual growth. That said, I think we could maybe end up with somewhere closer to 2.5% annual growth, which is better than the between 3%-4% growth that we saw in most of 2023, and much better than what we saw in 2022. Cooling inflation growth is a big reason why rates are less likely to increase in 2024. Generally, the lower inflation is, the less likely we are to see rate hikes, be those rate hikes directly from the Fed or mortgage rate hikes, which are rooted in other factors like what's happening in the bond market. Q: I presume from your comments that you're not anticipating a recession in 2024. Channel: That's right. People have been talking about a recession forever. A recession is one of those things where there is not a universally accepted definition. Generally, when we talk about recession, we mean two or more consecu- tive quarters of negative GDP growth. That's not necessarily the only definition, nor is it necessarily the best definition. Regardless, from where I'm sitting, the economy has been remarkably resilient despite tons of headwinds, from higher rates to persistently high inflation, to rising consumer debt. You can't deny that all of those things are problems, but the economy keeps chugging along. Just look at the GDP figures from Q3 2023, the latest revised estimate showed a very strong 4.9% growth. On top of that, if you dig into how people are handling the economy, in a lot of ways, people generally seem to be doing okay. It's one of those things where if you ask people, "How's the economy doing?" most of them will say, "It's doing bad." But then if you ask them, "Well, how are your finances doing?" most people say, "Oh, they're actually doing really well." That doesn't mean that everything is going amazingly well for ev- eryone—serious problems do exist—but it does suggest that we're probably not on the precipice of some major economic collapse. So, there is a disconnect between what people think is happening and what is going on, and based on that, based on how resilient the economy has been, I do think that we'll see that "soft landing" that we've been talking about, and I think we will skip a recession this year. Even if we do have one, it will be mild, and that means the unemployment rate will remain low—it was around 3.7% to finish out 2023. It might rise a little bit, but even if it rises to 4.2%, that's very low from a historical standpoint. Most people will keep their jobs, and most will continue to see wage increases, and if there's no recession, if nothing else, it just makes it easier for people to feel more comfortable buying or selling a house. It also probably means that it will be easier for mortgage lenders to say, "Yeah, I'm okay with issuing a loan." It's harder to get a loan when the economy is on fire than when everything seems like it's doing okay, even if it's not ideal.