The big news yesterday was that the Federal Reserve Board wrapped up their two day meeting and announced they will drop the federal funds rate for the first time since March, 2020. They slashed the rate not by .25% as some economist predicted, but by .5%. This will have a widespread effect on the overall economy, but what I'm most excited about is mortgage interest rates! While the federal funds rate is not directly correlated with mortgage interest rates, they are very much entwined. Here are four ways that this article predicts the announcement yesterday could affect the housing market.
If you follow mortgage interest rates, you may know that they have already been trending down. This is because mortgage lenders have been anticipating this announcement for a while and lowering rates accordingly. Because of this, rates may not change a lot right away. However, the fed has said that they plan more rate cuts in the future, and so that may have the result of bringing rates lower going into 2025. Charlie Dougherty, a senior economist at Wells Fargo, expects mortgage rates to drop "marginally" now and come closer to 5.5% by the end of 2025.
Housing prices could be on the rise. With more buyers applying for mortgages (this has already been happening), we could see more competition for the homes that are on the market. Inventory is still low so this could lead to multiple offers bringing up home prices. While inventory is low overall, it is especially low on starter homes. People who had trouble getting a home during the pandemic with low interest rates, bidding wars, and relatively low home prices, and then had a hard time affording a home with a huge price premium and an 8% interest rate are still looking to buy. With a lack of affordable starter homes available, the price of these homes could come up even higher.
Inventory could improve. Low housing inventory is a complex problem with many facets, but two big issues are home builders not building enough homes, and sellers not selling. Lots of sellers want to move but feel stuck in their 2.5% interest rates. Economists have predicted that 5.5% would be a good tipping point where people would feel comfortable trading up into a bigger house with a slightly bigger rate. With rates more affordable, builders will also have an easier time getting new developments started and building. Hopefully both of these will improve inventory soon!
Affordability could still be a problem for a while. While lower mortgage rates and improving inventory will certainly be helpful to improve affordability, it might just be too little too late. Even with lower rates, Dougherty says in some markets, home prices have risen 50% since the pandemic. Even with slightly lower rates, this just isn't attainable for many buyers, especially when incomes have not risen at the same pace. While lowering rates could help increase inventory as noted above, it may not be enough and it may take some time. Homes aren't built overnight and sellers may still wait for rates to continue to fall, and even then, may opt to stay put if their budget is tight.
All in all, the announcement yesterday was good news for home buyers and sellers alike. But, if you're trying to time the market I don't think it's necessarily a good idea to wait for rates to drop again, as prices could continue to rise. I think people should buy a house whenever it is right for their situation and they can comfortably afford the payment (plus maintenance costs, etc.), and not try to time the market perfectly. Prices will rise and fall as they always have, so will rates. But over time, your real estate investment will be well worth it!
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