How the Fed Rate Cut Impacts Housing

On Wednesday, the Federal Reserve made an unexpected move by cutting its target interest rate by 0.50 percentage points (or 50 basis points). This was the first rate cut in 1,650 days. During this time, we saw:

• 11 rate increases since early 2022.

• Mortgage rates peak at nearly 8% in October 2023.

• Existing home sales plummet to 1995 levels.

• Home affordability hit a 40-year low.

This is expected to be the beginning of a rate-cutting cycle, with further reductions expected later this year and into 2025.

How the Fed Rate Cut Impacts Housing

The Federal Reserve's decision to cut interest rates is generally positive for the housing market for several reasons:

Mortgage Rates: 

• While the Fed doesn’t directly set long-term rates like the 30-year mortgage, its policies influence them. With the recent cut already accounted for, we likely won’t see a significant drop in mortgage rates immediately. Expectations are that they will stay in the 6% - 6.2% range through the end of the year, and average 5.7% by the end of 2025.

Housing Market:

• As mortgage rates decline, the 'lock-in effect' will ease, leading to increased resale market activity. Lower rates often spur buyer demand. Fannie Mae’s Updated Forecast predicts a 9.8% rise in existing home sales in 2025, reaching 5.1 million, compared to 4.7 million expected this year.

Home Prices:

• Real estate markets are shaped by local factors like job growth, population trends, and housing demand. That’s why I track key indicators such as active listings, price reductions, and months of supply of inventory to spot shifts ahead of time. I anticipate the Westchester County market will continue to outperform the national average in price growth, largely due to our historically low inventory levels, and in part because of the decrease in rates.

Refinancing:

• Homeowners with existing mortgages may take advantage of lower rates to refinance their loans, reducing their monthly payments and freeing up disposable income for other expenditures. With rates just above 6%, some 4.2 million borrowers could lower their rates by at least 0.75 percentage point in a refinancing, the most since early 2022 according to the Wall Street Journal.

Ralph’s Take

Improving housing affordability is crucial, and the recent rate cut is a positive step in that direction. Lower mortgage rates can bring previously priced-out buyers back into the market, often adding new inventory as they sell their current homes. This should create more opportunities for both buyers and sellers in the coming months.

If you have any questions or want to discuss how this affects your plans, feel free to reach out.