No, the Fed Didn't Lower Rates, But This Is Why It's Still OK to Buy a House Right Now

So, it happened. The Federal Reserve Board met this week and to the surprise of many, they didn't lower rates. For some potential home buyers, this may crush all their hopes and dreams for a home purchase in 2024, but it really shouldn't. Here's why.

1. The federal funds rate doesn't directly impact mortgage rates

Oh, you thought the federal funds rate influences your mortgage rate? It's understandable, as many people talk about the federal funds rate like it's the root of all things -- good and bad. The truth is, though, that the federal funds rate rate is simply the rate that banks in the United States charge one another to borrow money overnight. It's a very short-term lending rate that isn't tied directly to the consumer. Banks themselves set the rate of mortgages, which is why you can shop your mortgage rate with different mortgage lenders and often come up with very different options.

The federal funds rate and mortgage rates do tend to trend together, but they don't have to. For example, over the last three months, the Fed has held the federal funds rate steady, but as of the writing of this article on Jan. 4, 2024, the average 30-year fixed mortgage rate is about 6.62%, according to Freddie Mac. That's down from the peak in October of 7.79%, despite there being no decrease in the federal funds rate in 2023.

2. Home prices are likely to continue to increase in 2024

No one is forecasting growth like we saw earlier in the decade, but housing prices have almost no choice but to continue to increase throughout 2024. According to the Federal Reserve Bank of St. Louis, existing home inventory was sitting at just 3.5 months in November 2023, with no indication of any serious change in that condition. That means that if the number of people looking for a home in November remained steady and the supply didn't change, it would take three and a half months to sell everything.

In other words, if there are 10,000 qualified buyers, and 35,000 available homes, it would take three months like that to sell all 35,000 houses in a perfect system. It's generally accepted that six months of inventory is pretty ideal to achieve a balance between a seller's and buyer's market, so we're still a long way away from balance.

It would be true to say that housing prices are down for the year as of November 2023, but that's pretty normal. The real estate market is seasonal, there's generally a lot less activity during the holiday season (ideal time to buy, really, if you're not too picky), and the best homes have already sold, leaving a lot more houses that are less than ideal to choose from, resulting in decreasing seasonal prices. HOWEVER, year over year, prices have not dropped at all.

In fact, the median price of an existing single family home in 2020, according to the National Association of Realtors (NAR), was $300,200; the same for 2022 was $392,800. We don't yet have final numbers for 2023, but NAR's projected figure for October 2023 was $396,100 -- up year over year and despite a significant increase in mortgage rates. The Federal Reserve Bank of St. Louis puts the figure for November 2023 at $392,100 -- still up significantly over November 2022's $378,700.

3. Housing creates permanence, security, and community

Even if I didn't expect housing prices to continue to rise as mortgage rates will likely moderate, there's one more incredibly important reason to ignore what the Fed is doing and just buy that house you've had your eye on: owned housing creates security, which in time improves your financial life in a million ways.

Owning a home is a foundation for your entire financial life. We too often severely underestimate just how much owning a house helps people build community, establish permanence, and allow people to work on their financial lives.

Although a lot of this is pretty intangible, a recent study from the Federal Reserve looked at all kinds of different ways family finances changed between 2019 and 2022, and one really interesting housing number popped up. Families who owned their homes had a median net worth of almost $400,000, versus the net worth of renting families, which was just about $10,000. (Remember, net worth is after your debts are cleared out, so if you have a $400,000 home, but a $350,000 mortgage, that's only $50,000 in net worth.)

Of course, there's a lot more at play here than simply owning a home -- this figure could be influenced by the types of people who tend to be homeowners, for example, but there's no ignoring the idea that homeownership contributes to this calculation.

Pay attention to the Fed, but don't make your decisions by its moves

If you're thinking about getting a mortgage in 2024, you don't need to be worried about where the federal funds rate stands. It may influence your mortgage payment some, but it isn't the end-all, be-all behind where your finances are headed. Far more important things to pay attention to include your credit history, any first-time home buyer assistance you may qualify for, and what kind of loan you're getting.

So, go forth, buy a house, find a financial foundation to start from, and be merry -- regardless of what the Federal Reserve does at its next meeting.