‘Little urgency to cut rates’
The odds of a rate cut by the Federal Reserve have steadily dropped during the spring and are a virtual lock to remain unchanged this week. According to the CME Group’s FedWatch tool, 99.8% of interest rate traders think the Fed will leave benchmark rates at a range of 4.25% to 4.5% on Wednesday.
Looking further out, roughly 12% of traders believe there will be a 25-bps cut at the end of July, while a majority (55%) think that cut will occur in mid-September.
“With inflation making progress, but remaining stubbornly above the Fed’s 2 percent target, and the labor market remaining resilient, the committee has little urgency to cut rates,” Odeta Kushi, deputy chief economist for First American, said in written commentary.
“However, while economic data looks solid for now, the outlook for the rest of the year is more uncertain, in part due to tariff impacts. Chairman Powell’s press conference and the updated projections will be closely watched for any change in outlook — whether more hawkish or dovish.”
Going into 2025, the consensus opinion of the Federal Open Market Committee (FOMC) was for a 50-bps decline during the year. But cuts have yet to materialize and this week would mark four straight times that the FOMC has held rates steady.
Rates haven’t been lowered since December 2024, when the committee made the last of three straight cuts totaling 100 bps. First American said it still expects a rate cut later in the year and potentially “modest relief for mortgage rates.”
Homebuilding, sales remain resilient
The company also analyzed data from the U.S. Bureau of Economic Analysis and found that housing currently accounts for about 16% of gross domestic product. This includes fixed residential investments like homebuilding and renovations, as well as housing services such as household utilities, rent and homeowners’ equivalent rent.
“While housing services are relatively stable, the homebuilding component is more volatile due to its cyclical nature,” Kushi wrote. “Housing is highly rate-sensitive, making it an important transmission channel for Fed policy. A slowdown in housing demand can depress activity across a wide range of upstream sectors, including construction materials and durable goods.”
Prior to the Fed’s meeting on Wednesday, the U.S. Census Bureau will release its May 2025 residential construction data. The report for April was a negative one as market observers blamed the trade war for year-over-year declines in single-family housing permits (-6.2%), starts (-12%) and completions (-16.6%).
But new-home sales remain up compared to a year ago, and they saw a bump of nearly 11% between March and April 2025.
Inventory is up and prices are down, and recent data shows that trend is likely to continue in long-running Sun Belt hot spots like Houston, Dallas, Orlando and Atlanta. Even New York City, which has notoriously strict land-use codes that tend to weigh down construction activity, saw a high number of building permits granted in March.
The existing-home segment is also relatively healthy compared to a year ago. HousingWire Lead Analyst Logan Mohtashami noted over the weekend that purchase mortgage applications have posted 19 straight weeks of yearly growth.
For-sale inventory is up 33% over the past year and the increased options for homebuyers are balancing out persistently high mortgage rates.
“As someone who described the housing market as unhealthy in late 2020 and savagely unhealthy in early 2022, the inventory growth we’ve experienced over the past two years has been a blessing,” Mohtashami wrote.
Altos President Mike Simonsen reported that home prices in 11 states are either the same or lower on a yearly basis — led by declines in Hawaii, Iowa and Arizona. Nearly two-thirds of respondents to an unscientific poll that Simonsen conducted expect home prices to decline for 2025 as a whole.
“Most of the price weakness is across the Sun Belt, where inventory has built the most and fewer buyers are moving from the north. It seems likely that Tennessee, Utah, and Washington are next in line,” he wrote.
