As signs of waning inflation and a cooling job market emerge, expectations are rising that the Federal Reserve will cut its benchmark interest rate for the first time in four years at its upcoming policy meeting. This has already started to influence mortgage rates, which fell to 6.20% last week, down from 6.35%. To put it in perspective, a year ago, rates were averaging 7.18%, making this the lowest rate since February 2023.
The Federal Funds Rate plays a major role in determining mortgage rates, though other factors like economic conditions and global events also contribute. A cut in the Fed’s rate sends signals about the broader economy, and mortgage rates tend to follow. While a single rate cut may not cause a drastic shift, it could help continue the gradual decline we’ve been seeing, as projected in the graph.
With inflation cooling and the job market slowing down, a Federal Funds Rate cut could further ease mortgage rates, making homeownership more affordable for potential buyers. As rates come down, we’re likely to see more buyers enter the market, leading to a projected increase in home sales by 2025. However, the upward pressure on home prices will be more moderate compared to the dramatic surges during the pandemic.
Why Lower Rates Are Good News for Buyers and Sellers
- Easing the Lock-In Effect for Homeowners
For current homeowners, lower mortgage rates could help relieve the “lock-in effect.” Many homeowners are reluctant to sell their homes due to higher current mortgage rates compared to the rates they originally locked in. A reduction in rates could make selling more appealing, especially if the prospect of securing a better rate becomes more feasible. However, experts don’t anticipate a flood of sellers entering the market, as many homeowners will likely remain cautious about giving up their low-rate mortgages.
- Boosting Buyer Activity
For potential buyers, a dip in mortgage rates makes homeownership more attractive by reducing overall costs. Many prospective homebuyers have been waiting for mortgage rates to drop further, and if the Federal Reserve follows through with a rate cut, it could lead to even more favorable conditions. According to Jessica Lautz, Deputy Chief Economist at the National Association of Realtors, “This is a substantial savings compared to October 2023, when mortgage rates hit nearly 7.8%. This could save a homebuyer more than $4,000 annually.”
Lautz also reminds buyers that while a Fed rate cut is expected, the mortgage market has already begun to factor in these anticipated changes. So, if you’ve been waiting for the right time to buy, now might be the time to make your move.
What to Expect Moving Forward
The real estate market is poised for increased activity as we move toward 2025. Lower mortgage rates are likely to bring more buyers into the market, which will sustain demand. While home prices may continue to rise, the increases are expected to be more measured than during the recent housing boom.
Whether you’re a buyer or a seller, these market shifts could offer new opportunities. Stay tuned as we follow the Federal Reserve’s decision next week and its potential impact on the housing market.
