What the Fed’s Rate Cutting Plans Mean for the Housing Market
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On Wednesday, the Federal Reserve announced a 50-basis-point cut to the federal funds rate, while projecting a comparable reduction through the rest of the year. (A basis point is one one-hundredth of one percent.) That was roughly what markets had priced in. Mortgage lenders have also already baked that assumption into mortgage interest rates: Since peaking over 7% in spring, rates have fallen more than a full percentage point. If lower mortgage interest rates are finally here, what does that portend for potential home buyers, refinancers and sellers?
Buyers' wait is over
Generally, when rates fall, buyer demand rises — but that didn't happen as mortgage rates dropped this summer, according to Chen Zhao, head of economic research at Redfin. She speculates this Federal Reserve announcement will bring more buyers to the market. "They're waiting to see the Fed take action, not realizing that this gets priced in early."
According to a recent NerdWallet survey conducted by the Harris Poll, 15% of Americans say they plan to buy a house once rates decrease. If you're in that 15%, now's probably a good time to start looking.
At the press conference following the Federal Reserve's announcement, chair Jerome Powell cautioned against expecting the kind of ultra-low interest rates we saw not only during the pandemic, but more generally throughout the 2010s. "I would say we're probably not going back to that era," Powell said.
"The Fed’s decision was pretty aligned with market pricing," Zhao notes, so a major drop in mortgage rates is highly unlikely. But if the Federal Reserve were to make further cuts more slowly than markets are currently predicting, she says "rates have a little bit of room to potentially come up."
Even if rates don't rise, lower mortgage rates can only go so far in the face of consistently high prices. In August, the median price of an existing home was $416,700, according to the National Association of Realtors. With a 10% down payment and a 7% mortgage rate, the monthly principal and interest on a home loan of that size would be about $2,500. The same loan at a 6% rate would have a roughly $2,300 monthly principal and interest payment. It's a savings of $200 per month, but still a sizable payment — and that amount doesn't include property taxes, homeowners insurance or other expenses.
For buyers, it's going to come down to timing. Not timing the market, but whether it's the right time for you. If you're ready to buy and find an affordable home that'll work for you, take the plunge.
More homeowners could save with a refinance
Folks who bought homes at higher mortgage rates have also been anxiously awaiting a rate cut. And with mortgage rates already at lower levels, some homeowners could benefit from refinancing. With 30-year interest rates near 6%, roughly 4.7 million homeowners could lower their interest rates at least 75 basis points, according to data from real estate tech firm ICE Mortgage Technology.
The usual rate-and-term refi math is to figure out how much refinancing will cost you, which is generally 2% to 6% of the loan amount, and compare that with how much you'll save on a monthly basis with that new interest rate. Dividing the cost of the refi by the monthly savings tells you the number of months — or more often, years — it'll take for you to break even and see real savings.
Homeowners considering a refinance should think about how this math works for their budgets and goals. "Be fully aware of where your break-even point is and ask yourself that question of how long do you think you might be in a property," says Leo Pareja, CEO of brokerage eXp Realty. For some homeowners, he points out, lowering your interest rate might be incentive enough. "You may not care about the break-even point, because on a cash-flow basis, that's more important. It's a personal decision of what to do."
The key to rate lock in
There's an even larger number of homeowners on the opposite end of the mortgage rate scale, with mortgage rates that are well below even today's lower rates. As of the second quarter of this year, more than half of U.S. mortgage borrowers have interest rates that are below 4%, according to data from the Federal Housing Finance Agency.
This gap between borrowers' rates and current rates creates a "lock in" effect, where homeowners are reluctant — or in some cases, can't afford — to give up that lower interest rate by selling their home. FHFA researchers estimate that for every percentage point that prevailing rates exceed a homeowner's mortgage rate, there's a more than 18% decrease in the probability that the owner will sell.
"Right now, we're in a market for have-to-move," Pareja says, noting that major and sometimes unforeseeable life events, like divorce or a job loss, will force home sales regardless of interest rates. But as rates lower, other factors like wanting an upgrade, or a new location or more (or less) space may become strong enough motivators to sell a home. "I think there's a threshold that people are going to, and that threshold will be very different for each household," Zhao says. Current homeowners may need to decide whether the perks of a new place outweigh a higher monthly mortgage payment. For some, finding a home that's a better fit will be well worth the price.
