In a bold move that signals a victory over inflation and provides much-needed relief for borrowers, the Federal Reserve delivered a jumbo-sized rate cut this week. Few sectors of the economy have welcomed this news more than the nation’s sluggish housing market, where high mortgage rates have left many potential homebuyers on the sidelines.
However, despite the optimism surrounding this policy shift, experts caution that the rate cut is unlikely to bring an immediate drop in mortgage rates or rapidly revitalize the housing market. While mortgage rates had already been falling in anticipation of this decision, the recovery in the housing sector will likely unfold gradually, with homebuyers beginning to feel the benefits over time.
“This is a harbinger of good times to come, but we’re not there yet,” said Susan Wachter, a professor of real estate at the University of Pennsylvania’s Wharton School of Business, speaking with ABC News.
What the Fed’s Rate Cut Means for Mortgage Rates
Despite the excitement surrounding the Federal Reserve’s rate cut, experts are quick to point out that its impact on mortgage rates will not be immediate. Mortgage rates had already dipped in anticipation of this move, with the average interest rate for a 30-year fixed mortgage standing at 6.09% according to Freddie Mac’s latest data. This marks a substantial drop from the rates seen earlier in the year, which had peaked in October 2023.
“Everyone has been expecting this Fed funds rate reduction,” said Jessica Lautz, deputy chief economist at the National Association of Realtors. “The mortgage market has been adjusting for some time.”
Evidence of this can be seen in the yield on 10-year Treasury bonds, which mortgage rates closely track. While the Federal Reserve’s rate cut would typically push Treasury yields down, the yield on the 10-year bond actually ticked slightly upward following the announcement, indicating that the market had already priced in the rate decision.
According to Lu Liu, a professor at the Wharton School, this pattern reflects investor expectations: “Ten-year rates are already pricing in the effect of interest rates coming down.” Experts anticipate a gradual decline in mortgage rates through the remainder of 2024 and into 2025, though the pace will depend on economic conditions and investor sentiment.
The Federal Open Market Committee (FOMC), which sets the central bank’s interest rate policy, has projected further rate cuts through 2024. By year-end, interest rates are expected to fall nearly another half percentage point, with additional reductions forecast for 2025. If these projections hold, mortgage rates could trend downward, potentially reaching the 5% range by the end of 2025.
While some, like Wachter, predict mortgage rates could fall as low as 5%, others, like Lautz, foresee slightly higher levels, estimating rates in the high 5% range. Nevertheless, it’s unlikely mortgage rates will ever return to the historically low levels of 2% or 3% seen during the pandemic-era rate cuts, a scenario Lautz described as “a very unusual environment.”
The Housing Market Outlook
Despite the Federal Reserve’s rate cut, experts do not expect a sudden surge in the housing market. Current conditions remain sluggish, with existing-home sales down 2.5% in August from the previous month, according to the National Association of Realtors. This slowdown has persisted despite the recent decline in mortgage rates.
Nevertheless, the housing market is expected to gradually warm up as lower borrowing costs trickle through to prospective buyers. The reduction in mortgage rates will make home loans more affordable, encouraging more buyers to enter the market and begin the often lengthy home-buying process.
However, a lingering “lock-in effect” could dampen the recovery. Many current homeowners locked in ultra-low mortgage rates during the pandemic, and with rates still well above those levels, they may be hesitant to sell their homes and take on higher borrowing costs for their next purchase. This reluctance could continue to constrain the supply of homes on the market, keeping prices elevated even as demand grows.
“With rates coming down, we may see more homeowners willing to move and sell, but supply will remain tight, and prices aren’t likely to drop significantly,” said Liu. Lautz agreed, calling it “a slow burn” and predicting that as mortgage rates continue to fall, more buyers will be able to afford homes, slowly reigniting the housing market.
Conclusion
While the Federal Reserve’s rate cut signals relief for borrowers and potential homebuyers, its impact will not be felt immediately in the housing market. Mortgage rates have already been adjusting in anticipation of this move, and the recovery of the housing sector is expected to be gradual. As borrowing costs decline and more buyers are enticed back into the market, we may see increased activity, but existing supply constraints will likely keep prices firm. For homebuyers, patience will be key, as the market slowly responds to this new phase of monetary policy.