Yun: Fed Rate Cut May Have Little Impact on Mortgages

Editor’s Note: This article first appeared in Realtor Magazine.

CHICAGO—The Federal Reserve did what the real estate market has long been waiting for and lowered its key benchmark rate Wednesday—the first time in four years. The Fed dropped its rate by 50 basis points; so, what could this mean for mortgage rates? Maybe not much at first.

The Fed’s rate influences but is not directly tied to mortgages. As the Fed feels more confident in its battle against inflation, many economists believe the rate cut could be the first step in helping to eventually move mortgage rates lower. However, it’s debatable how much.

“The Fed’s half-point rate cut decision is the beginning of six to eight rounds of further rate cuts well into 2025,” says Lawrence Yun, chief economist at the National Association of Realtors. But “mortgage rates have already anticipated the Fed’s likely path.”

The Fed was largely expected to lower rates at its mid-September meeting, so mortgage rates may already have preemptively dropped in recent weeks to account for that expectation. The rate for the 30-year mortgage is down 150 basis points from earlier in the year, Yun says. Last week, the 30-year fixed-rate mortgage averaged 6.2%, down from 7.18% a year earlier, Freddie Mac reports.

“Any further decline in mortgage rates will be minimal,” Yun says. “The Fed does not directly control mortgage rates, and the federal budget deficit is huge. Future Fed rate cuts are not only anticipated but will not be as impactful because large federal borrowing will leave less capital available for mortgage lending.”

Still, some home buyers may be holding out for even lower mortgage rates. That could happen, although economists are not predicting a drastic drop. Many economists have predicted rates to average about 6% by the end of the year.

But every drop could help in releasing pent-up housing demand. Home sales were sluggish this summer, and lower mortgage rates could motivate more prospective buyers to make their move.

The lower mortgage rates compared to the spring have already helped to improve the purchasing power of many home buyers, equating to about $50,000 in savings for those with a $2,000 monthly mortgage payment, Yun says. “Consumers who were priced out due to earlier higher mortgage rates could now be back in the market,” he says.

Any further rate cuts could get even more home buyers off the sidelines, says Chris Heller, co-founder of Agent Advice. “An interest rate cut helps first-time buyers and buyers in the lower income brackets disproportionately more than it does higher-income buyers,” he says. “This is because their home payment and mortgage usually take up a larger portion of their income.”

Lower rates can indirectly benefit sellers since it increases buyers’ purchasing power and options, Heller adds. “Real estate agents should communicate the urgency for their clients,” he says. “Because of the advantages of owning or selling real estate, it is in the best interests of both the buyer and seller to buy or sell as soon as possible.”

Reprinted from REALTOR® Magazine Online (http://realtormag.realtor.org), Sept. 18, 2024, with permission of the NATIONAL ASSOCIATION OF REALTORS®. Copyright 2024. All rights reserved.