In its much-anticipated September meeting, the Federal Reserve made a bold move by cutting its benchmark interest rate by 50 basis points, bringing the target range down to 4.75% to 5%. This marks the first rate cut since the COVID-19 pandemic began in 2020. But what does this mean for homebuyers and the housing market? Let’s break down the key decisions from the Fed’s meeting and how they might impact those looking to buy a home.
The Fed’s September Decision
After a year and a half of hiking interest rates to combat inflation, the Fed finally decided to lower borrowing costs. This rate cut comes as inflation has steadily cooled, with the consumer price index (CPI) showing a year-over-year increase of 2.5% in August, down from the 2022 high of 9.1%. While inflation is moderating, the Fed is now turning its attention to a labor market showing signs of softening, with slower job growth and a slight rise in unemployment.
By lowering rates, the Federal Open Market Committee (FOMC) is attempting to prevent economic slowdown, hoping to strike a delicate balance between keeping inflation in check and supporting employment. Fed Chair Jerome Powell emphasized that future rate changes will be made on a “meeting-by-meeting” basis, meaning the Fed will closely monitor economic data before making additional adjustments.
How Does This Affect Mortgage Rates?
The Fed doesn’t directly set mortgage rates, but its decisions do influence them. Here’s how:
- Fixed-Rate Mortgages: These popular home loans don’t follow the federal funds rate directly. Instead, they track the 10-year Treasury yield. When the Fed cuts rates, it can signal to the market that borrowing costs are likely to fall, which can push the Treasury yield down and, in turn, lower mortgage rates. While we may not see immediate drops in fixed mortgage rates, they are expected to trend lower over the next several months as the Fed continues its rate-cutting cycle.
- Adjustable-Rate Mortgages (ARMs): ARMs are more directly impacted by the Fed’s rate decisions. These loans have interest rates that reset periodically based on broader economic conditions, including the Fed’s policies. As the federal funds rate goes down, homeowners with ARMs are likely to see their rates decrease at the next adjustment, potentially lowering their monthly payments.
Why the Rate Cut Matters for Homebuyers
The Fed’s decision to cut rates could be good news for potential homebuyers. Lower interest rates generally make borrowing cheaper, which could help more people qualify for mortgages and lower monthly payments for those already in the market.
Here’s what it means for homebuyers:
- Lower Borrowing Costs: As mortgage rates gradually decrease in response to the Fed’s actions, the overall cost of buying a home could go down. This is especially important for buyers who were priced out of the market during the Fed’s rate-hiking cycle in 2022 and 2023 when mortgage rates climbed to over 7%.
Potential Surge in Demand: With borrowing costs dropping, more buyers could re-enter the housing market. This increase in demand could lead to a more competitive market and an increase in prices, especially in areas where housing inventory remains low. Buyers should be prepared for potential bidding wars in some markets.
Note: Using a Knock Bridge Loan to make competitive, non-contingent offers can increase your chances of winning the bid on your dream home.*
- Find the Right Timing: Keep in mind that, although the Fed’s September rate cut is a step toward lower mortgage rates, these rates may not drop immediately. Buyers should closely monitor the market and be ready to act when not only the mortgage rates align with their financial goals, but also when other life factors—such as job relocation, kids' school schedules, or finding the perfect home—are in sync. And don’t forget, you can always refinance later!
The Fed’s Long-Term Plans
According to projections released during the September meeting, many FOMC members expect the federal funds rate to continue falling through 2025. The Fed’s "dot plot," which shows individual members’ expectations for future rates, indicates that another 50 basis points in cuts could come by the end of 2024.
While the current rate cut is a positive sign for homebuyers, the path forward remains uncertain. If inflation picks up again, or if the economy faces unexpected shocks, the Fed could slow its pace of rate cuts or even reverse course. For now, the Fed appears committed to gradually easing rates to support the economy and avoid tipping into a recession.
What Should Homebuyers Do Next?
If you’re in the market to buy a home, here’s how you can take advantage of the current environment:
- Shop Around for the Best Rate: Mortgage rates are expected to decline, but they can vary significantly between lenders. Get multiple quotes to find the best deal and keep an eye on the annual percentage rate (APR), which gives a clearer picture of your total borrowing costs.
- Prepare Your Finances: Regardless of where rates head, maintaining strong credit, keeping your debt-to-income ratio low, and saving for a larger down payment can help you secure better loan terms.
- Consider a Knock Bridge Loan: The first step is to check if your departing property qualifies for a Knock Bridge Loan at qualify.knock.com, ensuring you're prepared the moment you're ready to buy.
The Bottom Line
The Fed’s September rate cut signals the start of a potential easing cycle that could lower borrowing costs for homebuyers. While mortgage rates aren’t guaranteed to drop immediately, they are likely to decline in the coming months, offering a window of opportunity for those looking to buy a home. Staying informed, shopping around, and preparing your finances will help you take full advantage of the evolving market.
*The Knock Bridge Loan™ allows you to buy before you sell by leveraging the equity in your current home to purchase your next one. It lets you make competitive, non-contingent offers, giving you greater certainty and control over the homebuying process for a smoother overall experience. See if you or your client qualifies for a Knock Bridge Loan at qualify.knock.com
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