Federal Reserve Rate Cuts: What Does Cutting Interest Rates Do for the Housing Market?
It’s been just over a month since the Federal Reserve cut interest rates by 1/2 percentage point. If you’re still unsure what “Federal Reserve rate cuts” refers to or would like to learn about the effects of cutting interest rates on the housing market, you’ve come to the right place! Let’s dig into what cutting interest rates means and, more specifically, the effects of cutting interest rates on the housing market.
So, What Does Cutting Interest Rates Do?
When the Federal Reserve (often called the Fed) cuts interest rates, it essentially lowers the cost for banks to borrow money. In simple terms, this means banks have access to cheaper money, which they can then pass on to consumers and businesses through lower interest rates on loans, including mortgages. The goal is to stimulate economic growth by encouraging borrowing and spending, including home loans and mortgages.
Mortgages and Home Loans: What Happens When the Fed Cuts Interest Rates
So, how does the interest rate cut affect mortgage rates? When the Fed cuts interest rates, it directly impacts mortgage rates. Lower interest rates generally make mortgages more affordable, lowering monthly payments. And the impact of the interest rate cut on home loans makes it easier for potential homebuyers to qualify for a loan. A reduction in mortgage rates can boost housing demand because buyers can get more house for their money (the good ol’ “more bang for your buck” situation).
Additionally, people with adjustable-rate mortgages or those looking to refinance their existing loans can benefit from the lower rates, reducing their monthly expenses and potentially saving thousands over the life of the loan. However, it's important to note that while the Fed influences mortgage interest rate cuts, it doesn't directly set mortgage rates, which are also impacted by factors like inflation and market conditions. You can read more about this here on Investopedia.
Other Effects of the Interest Rate Cut on Housing Market
The effects of cutting interest rates extend beyond lower mortgage payments and easier access to home loans.
- A drop in interest rates often leads to increased home buying activity, as buyers feel more confident taking advantage of the savings. Many renters will now take the plunge into buying a home, as they know real estate is one of the best ways to build wealth. As this CNN interviewee succinctly said, “When you take out a mortgage, you’re building wealth. When you’re renting, that money is going to someone else.” ~ Robert Galvez
- What do interest rate cuts mean for housing prices? Well, healthier competition among buyers can potentially drive up home prices. However, despite the potential for higher home prices, overall affordability still improves because of the lower monthly mortgage payments.
- Power can shift from the seller to the buyer, which makes the home purchase process less frantic and allows the potential buyer to make better choices, like opting for a home inspection before buying the property.
- Homeowners are more likely to invest in improvements, refinancing, or upgrading to larger properties. While this could benefit buyers, sellers also gain as their properties become more desirable in a competitive market. However, some caution that buyers should still be prepared, as limited housing inventory could mean that, even with lower rates, finding the right home may still be challenging.
Impact of Interest Rate Cut on the Housing Market - What We’ve Seen So Far
So, as we noted at the beginning, it’s been just over a month since the Fed cut interest rates, and here are the impacts we’ve seen so far:
- Homebuyers have already benefited, with mortgage rates dropping from a high of 7.9% to 6.4%. (This might not seem like a lot, but even slight reductions in mortgage rates can lead to significant savings in interest costs over time.)
- The Federal Reserve plans to continue decreasing interest rates over the next couple of years. Fannie Mae predicts the average 30-year mortgage rate will fall to 5.7% by the end of 2025. So savings should continue and increase.
Overall, the future of real estate is looking bright!
Take Advantage of the Federal Reserve Rate Cuts in Real Estate
If you want to make the most of the current interest rate cuts and are considering buying a home in the Mobile, Alabama, area, Leslie Davis and the Key Performance Team are here to help. Contact KPT today to start your home-buying journey!