Many homebuyers are eagerly anticipating the Federal Reserve’s upcoming decision on interest rates, hoping for a much-needed reprieve from soaring mortgage rates. However, even with the projected decrease in the Fed’s benchmark rate, it may not lead to significant reductions in mortgage rates immediately.
Since early May, the average rate for a 30-year mortgage has fallen over one percentage point to around 6.2%. Experts in the housing market indicate that this drop may signal that mortgage rates won’t descend dramatically following the Fed’s decision this week. Danielle Hale, Chief Economist at Realtor.com, points out that most benefits from rate cuts have been absorbed already, emphasizing that the Fed’s forthcoming comments about future economic strategy will likely have a more substantial impact on ongoing rate declines.
The Federal Reserve has indicated it is inclined to lower rates to foster economic growth. However, a variety of recent economic data complicates this picture. For instance, while inflation showed signs of easing in August, it remained persistent in several critical areas, particularly housing. Additionally, the labor market added fewer jobs than analysts had anticipated, although wage growth — a closely tracked inflation indicator — remained robust.
Market participants see approximately equal chances for either a 25 or 50 basis point cut during Wednesday’s meeting, based on the latest CME FedWatch data. Following this week’s expected cut, several additional reductions may occur in November and December, potentially ending the year with the benchmark rate approximately one percentage point below its current range of 5.25% to 5.5%.
Interestingly, Chen Zhao, who leads economic research at Redfin, suggests that mortgage rates might actually experience a slight uptick in the coming months. This counterintuitive notion arises if the Fed’s cuts do not materialize as rapidly as anticipated.
The last rate-cutting cycle, prior to the pandemic, exhibited a similar trend. Mortgage rates reached nearly 5% in late 2018 but declined to around 3.75% by the time the Fed initiated cuts in July 2019, continuing within the 3.5% to 3.8% range despite subsequent reductions.
But why are so many prospective homebuyers banking on more drastic drops? Research by Kelly Shue, a finance professor at the Yale School of Management, highlights a cognitive bias among consumers and professional forecasters. Many tend to conflate short-term interest rates, like those influenced by the Fed, with long-term rates such as those for mortgages. This “categorical thinking,” while simplifying complex information, can lead to misconceptions about how these rates interact.
Shue asserts that waiting for a better interest rate is often unnecessary and can adversely affect potential buyers. She advises those seeking long-term loans or refinancing not to hesitate out of fear of timing the market. In the current landscape, seasoned loan officers, like Austin-based Kristin Bailey, are experiencing a surge of inquiries from buyers eager to discuss their actions following the Fed’s anticipated rate cut. However, she emphasizes the value of addressing these concerns before the cut takes effect.
Even though we might not see substantial drops in mortgage rates, hopeful buyers could navigate the housing market with slightly more ease this fall and into winter. An increase in housing inventory has been observed this year, reaching post-pandemic levels of over 909,000 homes in August, according to Realtor.com. Currently, median monthly payments on existing mortgages stand approximately $300 lower than they did at the peak rates of over 7% in May, enhancing overall affordability.
Experts are optimistic that the housing market will eventually revert to long-run averages, suggesting that 2025 may become a significant year for buyers seeking better opportunities. As the landscape continues to evolve, understanding the dynamics of interest rates, inflation, and housing supply will be vital for prospective homeowners ready to make a move.