It’s coming. The Fed has strongly intimated that an interest rate is coming, most likely at its next meeting Sept. 18, and most everyone connected to real estate sales awaits with great hope. But will it really make a difference? Will one single rate cut of perhaps as much as half a percentage point really drive reluctant but hopeful buyers into action? Or will it take several more cuts? Who can know for sure?
Over the past few weeks, the 30-year mortgage rate has fallen to its lowest level in 15 months, at around 6.47%, falling about 25 basis points according to a survey of lenders released by Freddie Mac. This marks the lowest level for home loans since May 2023.
It’s been quite a rollercoaster ride for rates over the past few years, one that very likely will never be experienced again. When there is a rare (hopefully) event like the pandemic, during which drastic action was undertaken on economic and other fronts, sending mortgage rates plummeting to their lowest levels in modern history, it’s clearly a one-off.
Now? We’re back to the normalcy of rates simply mirroring the U.S. economic realm, with fears of inflation and recession causing Federal Reserve decisions. In the recent official comments July 31, the Fed, headed by Chair Jerome H. Powell, expressed cautious optimism.
“Recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have moderated, and the unemployment rate has moved up but remains low. Inflation has eased over the past year but remains somewhat elevated. In recent months, there has been some further progress toward the Committee’s 2% inflation objective.
“In support of its goals, the (Federal Open Market) Committee decided to maintain the target range for the federal funds rate at 5¼% to 5½%. In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook and the balance of risks. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.”
Then on Aug. 22 he practically guaranteed a rate cut, or multiple cuts, are coming.
Nevertheless, the real estate industry continues to monitor the developments, as interest-rate dips usually take mortgage rates along for the ride. And while the Fed is almost always conservative in its approach, there is widespread opinion that a rate cut is upcoming. The benefit for just one mortgage rate point is indisputable. The principal and interest payment on a $400,000 30-year mortgage at 7% would be $2,661. At 6% it falls to $2,398. That’s a savings of nearly $95,000 over the life of the mortgage.
But again, will a cut cause ripples in the housing market? What do agents, brokers and mortgage professionals think?
“For homebuyers, the stars are aligning: Solid economic growth, lowering inflation and indications from the Fed that a rate cut is imminent basically opens the door for potentially lower mortgage rates in the near future,” says Melissa Cohn, regional vice president of William Raveis Mortgage. “With jobless claims increasing as well, we’re looking at a potential rate cut, which is ‘music to mortgage rates’ ears—rates are coming down.”
Cohn cautioned that mortgage rates will not drop to pandemic levels, so homebuyers must be realistic.
“They bottomed at 3%, and I don’t believe we’re ever going to get back to that,” she said. “Mortgage rates are going to come down an eighth of a point at a time, the same way that the Fed is only going to cut rates a quarter point at a time, probably. So, it’s a little bit of a slow drip.
“People also need to remember that mortgage rates aren’t going to change based on a Fed cut. Your home equity rate will drop. Student loans, car loans, those rates will drop every time the Fed cuts rates, but mortgage rates are tied to the bond market, and the bond market is more affiliated with the rate of inflation and bad economic data than it is to the Fed funds rate. The tone of the market has changed, and the doves are ready to fly out of the cage.”
Pam Rosser Thistle, an agent with Berkshire Hathaway HomeServices Fox & Roach, REALTORS® in Philadelphia, cites national and global storm clouds as also having an effect on potential homebuyers committing to a major purchase at the present time.
“My sense is that people are hesitant to make big changes with the turmoil in the world, inflation and changes to how we conduct real estate,” she says. “Also, it’s August and many are away. I think the rest of the year through the election will be flat. There will be activity and sales, but not at an accelerated pace.
“We need to cautiously coast through these times, then get back on track as the economy finds its footing. Mortgage rates came down and are now in the sixes. Powell will speak in September, when it’s expected he will make a rate cut. These are dicey times. But so was Covid, and sales spiked. So we will see. There is something eerie about these times. I am jumping on every opportunity, but there are few. I’m hoping it smooths out after the election. People don’t like uncertainty.”
Nick Bugemelian, of RE/MAX Heritage in New Jersey, is optimistic that even a small cut would produce sales results.
“Initially, a slight rate cut is likely to boost sales activity, particularly for buyers already in
the market,” he says. “It would increase their purchasing power, making payments more manageable and allowing them to make more competitive offers. This cut could also motivate fence-sitters to take advantage of the lower rates, and for buyers with limited budgets, it would improve their ability to qualify for a loan. However, if the supply of homes remains low, competition will increase. While sales activity might seem to improve in the short term, the overall impact may not be significant.
“On the other hand, multiple rate cuts would likely encourage even more buyers to lock in lower rates before they rise again. It will also prompt homeowners with existing low-interest rates, who were previously unwilling to sell and purchase a new home at a higher rate to list their homes, thereby increasing inventory. Substantial rate cuts that meaningfully improve affordability could drive increased buyer activity over time. However, all of this depends on the overall economic conditions remaining stable.”
Melissa Hoff, broker associate and team leader of The Hoff Group at Compass, in Florida, notes there are two potential extremes.
“A slight rate cut will get people to start looking to buy a home while contemplating whether or not to re-sign their (rental) leases,” she says. “A big rate cut will start a frenzy and will cause home prices to go up slightly because the bidding wars will start again. A lot of people have been waiting on the sidelines for some relief for a few years now, so there is a big pool of potential homebuyers waiting to enter the market.”
Phil Gutman, founder of Miami-based Gutman Development Marketing, thinks a rate cut won’t do much.
“I don’t believe a slight rate cut is going to move the needle,” he says. “People went from seeing rates around 3% during the pandemic to more than double now. Once there is a more significant rate cut, things should change in terms of homebuyers taking action. I don’t anticipate there being any significant rate cuts now. A lot of people are waiting to see what happens after the election as well.”
Ryan Reich, founder and CIO of Mountain Shore Properties, a multi-state development company, was also unconvinced there would be significant homebuying after one rate cut.
“What will cause home sales to pick up? Put simply, mortgage rates need to come down significantly for impactful change,” he says. “Right now the average 30-year rate is 6.5% and the average existing mortgage rate is a little above 4%. I believe we need to see mortgage rates below 6% to see any meaningful pickup in home-sale activity. The market is already pricing in 150-200 basis points of rate cuts over the next two to three years, so the fact that the Fed simply cuts rates at the upcoming meeting (in and of itself) isn’t going to matter very much.
“That being said, as the Fed lowers the overnight borrowing rate, short-term funding economics will improve for lenders, which should allow for mortgage spreads to narrow (and thus lowering mortgage rates). Mortgage rates need to fall substantially from the current level in order for us to see a pickup in home sales activity…(f)uture economic data and the Fed’s guidance around how they will respond to that data is likely to have a far greater impact on mortgage rates than the 25 basis points cut itself.”
David Sober, SVP of enterprise business development at Voxtur Analytics, is optimistic that homebuying momentum will pick up soon due to federal initiatives combining with lower rates.
“Mortgage interest rates are at their lowest since early 2023, and the data show that there has been a meaningful uptick in mortgage applications over the last couple of weeks, which we’ve seen reflected in our business,” he says. “With a probable official rate cut coming from the Fed in September, we expect this momentum to continue through the year.
“Lower rates combined with initiatives from Fannie Mae and Freddie Mac, such as the title waiver program and promotion of cheaper, alternative title and valuation solutions, should provide tangible relief to the consumer. For mortgage lenders, the downward shift in rates also makes it imperative to keep close watch on their servicing portfolios for recapture opportunities and to protect against the deterioration of MSR (mortgage servicing right) values. We have started to see our clients reach out to us to prepare for these scenarios as we closely monitor whether this current swell in demand will turn into a sustained surge.”
Until there is actually Fed action, it’s all a waiting game. And even if and when there is a decision, it doesn’t necessarily mean mortgage rates will instantly drop.
“The Fed’s tone will matter, too, so buyers will want to watch the markets to see what happens next,” says Cohn.
“Will they broadcast that this is the first of a series of rate cuts?” Cohn asks, as the Fed may have more than one cut waiting in the wings, which could affect homebuyers’ decisions. “I think it’s more the message that the Fed sends to the markets, and how the markets react to what that message is, that will determine the fate of mortgage rates.
“I’ve heard from a lot of people who locked in over the course of the past 18 months, when rates were at their peak, already asking whether it’s time to refinance and what savings they could have. I think that the outlook is good, and hopefully that spills into the real estate market, and we get more buyers in the market.”
