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Sorry, Homebuyers: A Fed Rate Cut Might Not Actually Lower Your Mortgage Rate
By Leslie Cook MONEY RESEARCH COLLECTIVE
Despite the headlines promising rate relief, this week’s decision probably won’t move the mortgage-rate needle all that much — at least, not in the way they’re expecting.
For house hunters hoping for relief from the high mortgage rates that have been the trademark of the housing market over the past two years, the prospect of a Federal Reserve rate cut sounds promising.
Alas, they shouldn’t get too excited. Despite the headlines promising rate relief, this week’s decision probably won’t move the mortgage-rate needle all that much — at least, not in the way they’re expecting.
Ahead of this week’s meeting, Money spoke with Daryl Fairweather, chief economist at the real estate brokerage Redfin, about how the central bank’s decision could impact rates and homebuyers moving forward. While she doesn’t anticipate mortgage rates to move very much if a cut is announced, the outcome of the meeting could determine their future path.
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View Rates“What could matter more than there being a rate cut is the commentary that [Fed chair Jerome] Powell gives during the press conference and the forward guidance the Fed gives,” Fairweather says. “It’s not so much the meeting. It’s the news that happens leading up to and even during the meeting.”
She’s referring to economic data on labor and rising prices that could influence the central bank’s view of the economy and its policy decisions, given that the Fed has a dual mandate to keep inflation low and employment high. Over the past two months, increasingly weak employment numbers have led to a shift in the Fed’s public stance on interest rates.
As market expectations of a rate cut solidified, mortgage lenders started pricing in a cut.
Since mid-August, mortgage rates have fallen by more than a quarter of a percentage point. They now sit at 6.35%.
Whether today’s rates are low enough to lure homebuyers back in large numbers is another question. Home sales have seen a slight jump in recent weeks as mortgage rates decreased, but Fairweather says she believes that if rates were to slip below 6% — even just to 5.99% — more buyers would take advantage of the improved affordability.
“Buyers are aware of the relationship between rates and their own purchasing power, so I would expect [them] to react right away,” Fairweather says.
The economist calculated that the increase in buying power since May, when mortgage rates were around 7%, to the beginning of September, when rates averaged about 6.5%, was about $20,000. If rates were to reach 6%, homebuyers would increase their purchasing budget by another $20,000.
While mortgage payments may become more manageable if rates move lower, there are still other affordability concerns. Homeowners’ insurance costs continue to rise, as do property taxes and maintenance costs.
On the bright side, the housing market isn’t likely to see a pandemic-style surge in home prices. According to Fairweather, sellers who have been locked into their ultra-low mortgage rates are almost as impacted as buyers: They’ve been waiting for rates to drop so they can afford to buy a new home and move. If rates were to fall below 6%, more homeowners would feel comfortable listing their properties, pushing inventory higher and helping to keep prices stable.
As important as mortgage rates are in the affordability equation, however, Fairweather advises against trying to time the market.
Instead, buyers should focus on their own financial situation to determine when it’s the right time to buy. Can they afford the mortgage? Will they stay in the home for at least five years, long enough to build some equity? If the answer to those questions is yes, it might be the right time to buy.
“Nobody knows what’s going to happen with rates,” she says. “You know your own personal timing a lot better than you do the economy.”
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Leslie Cook is Money's lead real estate editor, covering news stories about mortgages and how rate movements affect the housing market and writing and editing stories that inform our readers about real estate trends and how they affect homebuyers and sellers. Leslie writes a weekly newsletter, Money Moves, that covers a wide range of real estate topics in addition to her weekly articles. Her work has been featured on Apple News, MSN and ConsumersAdvocate.org. Leslie has been covering the mortgage and real estate industry at Money since 2019 and has interviewed industry leaders, such as Lawrence Yun, chief economist at the National Association of Realtors, and Glenn Kelman, CEO of brokerage Redfin. She has been a guest on the This Morning with Gordon Deal radio show, interviewed by The Mortgage Note, and served as moderator for ServiceLink’s State of Homebuying webinar. While at Money, Leslie has contributed to several of Money’s rating and ranking features, including Best Places to Live, Best Places to Travel and Changemakers. She has also played a major role in researching and selecting Money’s Best Banks rankings for the past four years. Before joining Money as a staff writer, Leslie was a reporter for Caribbean Business Newspaper in San Juan, Puerto Rico, covering human resources, telecommunications and computers. She graduated cum laude from Bryn Mawr College in Pennsylvania with a bachelor’s degree in history. The research and interviewing skills learned there have contributed to Leslie’s ability to provide accurate information on her area of expertise and elicit informative responses from her interviewees.