What the Fed’s rate cut means for homebuyers and sellers

The Federal Reserve announced Thursday that it will cut its benchmark interest rate by a quarter point. That follows September’s reduction of half a percentage point.

What the move means for the housing market is an open question. Mortgage rates fell sharply leading up to the Fed’s first rate cut, dropping all the way from 8.01 percent in October 2023 to 6.20 percent as of Sept. 18, 2024, according to Bankrate’s national survey of large lenders. However, they were back up to 7 percent as of Nov. 6, even as the mortgage market anticipated the Fed’s rate cut.

“Prospective homebuyers and sellers should still expect mortgage rates to fall through the end of the year and into next year, bringing welcome relief,” says Lisa Sturtevant, chief economist at Bright MLS, a large listing service in the mid-Atlantic region. “Looking ahead to 2025, mortgage rates will likely continue to come down, assuming no major inflationary pressures, though it is possible to see the average rate on a 30-year fixed rate mortgage remain above 6 percent through most of 2025.”

The Federal Reserve and the housing market

Earlier in the inflationary cycle, the Fed had enacted increases of as much as three-quarters of a point. Now that inflation is down, that round of tightening is over.

The Fed’s rate hikes slowed the housing market. Home sales dropped sharply — but home prices hit record levels. Because home values are not driven solely by interest rates but by a complicated mix of factors, it’s hard to predict exactly how the Fed’s efforts will affect the housing market.

Higher rates are challenging for both homebuyers, who have to cope with steeper monthly payments, and sellers, who experience less demand and lower offers for their homes.

“The Fed’s rate cut was widely anticipated and is unlikely to herald in much of a change for the housing market,” adds Selma Hepp, chief economist at CoreLogic, a real estate data firm. “Potential homebuyers will be disappointed to see that mortgage rates remain stubbornly high, as it also moves with the 10-year Treasury, so the markets will only slowly begin to normalize. We anticipate a much more improved rate environment for homebuying next year.”

How the Fed affects mortgage rates

The Federal Reserve does not set mortgage rates, and the central bank’s decisions don’t move mortgages as directly as they do other products, such as savings accounts and CD rates. Instead, mortgage rates tend to move in lockstep with 10-year Treasury yields.

Still, the Fed’s policies do set the overall tone for mortgage rates. Lenders and investors closely watch the central bank, and the mortgage market’s attempts to interpret the Fed’s actions affect how much you pay for your home loan. The Fed bumped rates seven times in 2022, a year that saw mortgage rates jump from 3.4 percent in January all the way to 7.12 percent in October. In 2023, mortgage rates went higher still, briefly touching 8 percent. They are now back to 7 percent (as of Nov. 6).

What happens to the housing market when interest rates rise?

There’s no doubt that record-low mortgage rates helped fuel the housing boom of 2020 and 2021. Some think it was the single most important factor in pushing the residential real estate market into overdrive.

When mortgage rates surged higher than they had been in two decades, the housing market slowed dramatically. And, while sales volume remains slow, prices are higher than they’ve ever been. The nationwide median existing-home price for September was $404,500, according to the National Association of Realtors — a record high for the month of September, and not far off June’s all-time-high of $426,900.

In the long term, home prices and sales tend to be resilient to rising mortgage rates, housing economists say. That’s because individual life events that prompt a home purchase — the birth of a child, marriage, a job change — don’t always correspond conveniently with mortgage rate cycles.

History bears this out. In the 1980s, mortgage rates soared as high as 18 percent, yet Americans still bought homes. In the 1990s, rates of 8 to 9 percent were common, and Americans continued snapping up homes. During the housing bubble of 2004 to 2007, mortgage rates were high, yet prices soared.

So the current slowdown seems to be more of an overheated market’s return to normalcy rather than the signal of an incipient housing crash.

The combination of elevated mortgage rates and steep home-price growth over the past few years has crimped affordability. But if mortgage rates pull back, affordability will become less of a factor. For instance, borrowing $320,000 at the early November rate of 7 percent translates to a monthly principal-and-interest payment of $2,129, according to Bankrate’s mortgage calculator. Borrowing the same amount at 8 percent translates to a monthly payment of $2,348. That’s a difference of $219 per month.

A continued decline in mortgage rates could create a new challenge, though: It will likely draw new buyers into the market, a surge that could further intensify the ongoing shortage of homes for sale.

Next steps for borrowers

Here are some pro tips for dealing with volatile mortgage rates:

• Shop around for a mortgage: Savvy shopping can help you find a better-than-average rate. With the refinance boom considerably slowed, lenders are eager for your business. “Conducting an online search can save thousands of dollars by finding lenders offering a lower rate and more competitive fees,” says Greg McBride, Bankrate’s chief financial analyst.
• Be cautious about ARMs: Adjustable-rate mortgages may look tempting, but McBride says borrowers should steer clear. “Don’t fall into the trap of using an ARM as a crutch of affordability,” he says. “There is little in the way of upfront savings, an average of just one-half percentage point for the first five years, but the risk of higher rates in future years looms large. New adjustable mortgage products are structured to change every six months rather than every 12 months, which had previously been the norm.”
• Consider a home equity loan or HELOC: While mortgage refinancing has yet to pick up steam, many homeowners are turning to home equity lines of credit (HELOCs) to tap into their home equity. The rationale is simple: If you need $50,000 for a kitchen renovation and you have a mortgage for $300,000 at 3 percent, you probably don’t want to take out a new loan at 7 percent. Better to keep the 3 percent rate on the mortgage and take a HELOC — even if it costs 10 percent.