What the Fed’s Rate Cut Means for the Housing Market

By now, you’ve probably heard about the news: the Federal Reserve recently cut interest rates for the first time in four years. 

But what does that really mean for home buyers and sellers? You might be wondering how this impacts mortgage rates, home prices, or your ability to make a move in today’s market. Understanding these changes could be your key to making smart real estate decisions—so let’s break it down.

A Closer Look at the Fed’s Decision

On September 18, 2024, Fed Chair Jerome Powell announced during his press conference that “We have in fact begun the cutting cycle now.” 

The Fed began its rate-cutting cycle with a half percentage point (50 basis points) reduction. This decision was expected, and experts believe more cuts could be made before the end of the year.

Keep in mind that the Fed doesn’t directly control mortgage rates. However, its decisions influence the financial markets, which is why mortgage rates started to drop this summer. Over the past year, we saw mortgage rates as high as 7.79% (October 2023), but they’ve recently fallen to around 6.20% (September 2024). 

For you, this could mean better affordability when buying a home or more opportunities if you're planning to sell.

How do mortgage rates impact purchasing power?

The recent decline in mortgage rates works in favor of buyers. 

Lower mortgage rates mean you can afford more house for the same monthly payment. In fact, a 1% drop in mortgage rates can significantly boost your buying power. According to Realtor.com, “a buyer who budgeted to buy the typical home in 2023 now has an extra $70,000 in home purchasing power for the same monthly cost.” 

Those sticking to a house at the same price point can see significant month-to-month savings. Mortgage rate shifts have led to $300 monthly savings compared to May 2024 and $340 savings compared to October 2023, assuming a 20% down payment on a typical home purchase. 

That’s a big deal for buyers.

Will mortgage rates continue to decline?

No one expects mortgage rates to take a nosedive. In fact, after Powell’s press conference, mortgage rates actually increased slightly—from 6.15% to 6.17%, according to Mortgage News Daily. 

Zelman & Associates’ managing director Alan Ratner explained why in a recent interview, which took place before the Fed’s rate cut. He stated that the early September drop in rates was due to the “mortgage market already pricing in a Fed easing cycle.” 

“We’ve seen mortgage rates already pull back roughly 100 basis points from the high, so the Fed simply announcing this week…that shouldn’t have too much of an impact on the mortgage market,” Ratner said. 

However, that doesn’t mean rates will go up, either. Ratner continued, “Over time, we do expect to see rates gradually decline as inflation remains tame.”

While there may be some fluctuation in rates, other experts agree that rates will likely continue a downward trend over time. Mark Zandi, chief economist at Moody’s, believes that “the 30-year fixed mortgage rate will be closing in on 6.0% by the end of the year and settle in near 5.5% by the end of 2025.” 

In addition, Fannie Mae revised its mortgage rate forecast and now expects mortgage rates to decline to 5.7% by the end of 2025. 

Will the lock-in effect finally break?

One of the biggest challenges for the housing market over the past two years has been the so-called “lock-in effect.” Homeowners who locked in ultra-low mortgage rates during the pandemic have been reluctant to sell, knowing they’d have to take a new mortgage at a higher rate. But with mortgage rates now trending downward, this effect might start to ease.

As Powell pointed out during the press conference, “As rates come down, people will start to move more, and that is probably beginning to happen already.” 

This shift could lead to more inventory hitting the market, but Powell was careful to note that this wouldn’t necessarily create a surge in demand. “When that happens, you’ve got a seller, but you’ve also got a new buyer in many cases. So it is not obvious how much additional demand that would make,” he said.

Will home prices go up or down?

The question everyone wants an answer to is whether home prices will rise if more buyers take advantage of lower mortgage rates. Powell addressed this concern, saying, “The housing market, it’s hard to game that out… The real issue with housing is that we have had, and are on track to continue to have, not enough housing.”

In other words, even as nationwide inventory has seen an increase, supply constraints are still a major issue. The supply of homes plays a huge role in determining prices. So, while more buyers may enter the market if mortgage rates decline, the overall impact on prices will depend on how much inventory is available. 

Final Thoughts

The Fed’s recent rate cut is a big deal for the housing market. While it’s hard to predict exactly how things will unfold, one thing is clear: lower mortgage rates are creating opportunities. If you want to dive into local data for The Black Hills, or are interested in what today’s mortgage rates mean for you, reach out here to schedule a discovery call 605-340-0768.