What homebuyers should know before the upcoming Fed meeting

As the Federal Reserve’s Sept. 18 rate announcement draws nearer, the headlines have grown increasingly breathless. The Fed has telegraphed that it will cut rates for the first time since 2020, so there’s not much drama on that front. But there’s plenty of other grist for the mill. Will the central bank’s cut be a quarter-point or a half? And what does it mean for the housing market?

If you’re currently buying a home, the best advice is probably to tune out the constant chatter and proceed with your plans. After all, the Fed directly controls neither home prices nor mortgage rates — and rates on home loans already have come down in anticipation of a Fed rate cut. What’s more, any move at the September meeting is likely to be modest, a contrast to the Fed’s push to slash rates in 2020 and then to quickly raise them in 2022 and 2023.

Why is everyone so focused on the Fed meeting?

The Fed’s next move will probably be incremental, and therefore have only a modest effect on the housing market. But market experts are hyper-focused on the Fed meeting regardless because, in the past few years, the central bank’s seismic shifts in policy have created shock waves for homebuyers (not to mention home sellers, and pretty much anyone working in the housing industry). 

Fed watchers expect the central bank to cut rates multiple times, but there’s little expectation that the new direction will repeat the stomach-churning ups and downs of recent years.

Housing market roller coaster

Since early 2020, both the global economy and the U.S. housing market have been on something of a roller-coaster ride. As the COVID-19 pandemic shut down spending, the Fed chopped rates to zero to help stave off a full-scale depression. While the Fed doesn’t directly control mortgage rates, its policies set the tone. When the Fed cut rates, yields on 10-year Treasury bonds — the benchmark for mortgage rates — plunged, too.

You remember the rest: In 2020 and 2021, mortgage rates plummeted to historic lows. For a time, borrowers were getting 30-year mortgages at rates less than 3 percent. That stimulated a housing boom and a refinancing surge.

Then, the world changed again. As vaccines became more available and the pandemic began to ease, the U.S. economy recovered more quickly than anyone expected. The new threat was inflation, which surged all the way past 9 percent, a level not seen since the bad old days of the early 1980s. The Fed had no choice but to respond aggressively, and in 2022 and 2023, the Fed raised rates all the way from zero to today’s range of 5.25 to 5.5 percent.

In this new reality of higher interest rates, mortgage rates spiked all the way to 8 percent in October 2023. Americans mostly stopped moving — after all, who would swap out a 3 percent mortgage for one at 7 percent or more? And with buyers discouraged by the combination of high rates and high prices, home sales plunged.

The best advice for buyers: Stay the course

If you’re shopping for a home, the most prudent course is to proceed as planned. While mortgage rates were at 8 percent not too long ago, the average rate on a 30-year loan was down to 6.47 percent in Bankrate’s latest national survey of large lenders. They might fall just a bit more in the coming months, but a really significant drop will happen only if another economic calamity hits.

Vishal Garg, CEO of mortgage lender Better, says buyers who close on a loan now potentially have an escape hatch: “If rates go down, just refinance in six months,” he says.

Another reason to buy now is that home prices could keep rising. The housing market defied expectations throughout the pandemic, as home prices rose during lockdowns and kept rising as mortgage rates shot up. It’s quite possible that the recent decline in mortgage rates will coax a rush of new buyers into the market — thereby boosting competition for a limited supply of homes for sale.