How Fed’s Rate Cuts Impact Real Estate Market

The Federal Reserve’s recent decision to cut interest rates by 0.25% can have a significant impact on both homebuyers and homeowners. While lower rates can make mortgages more affordable and increase borrowing power, they can also lead to increased competition and higher home prices. For current homeowners, refinancing may be a viable option to take advantage of lower rates. Additionally, a more active real estate market can potentially boost home equity. To make informed decisions, consulting with a financial advisor or real estate agent is recommended. 

Why Do Rate Cuts Affect Real Estate? 

The Federal Reserve (the Fed) actively shapes the interest rates on various financial products, from the returns on your savings account to the rates you pay on loans, credit lines, and mortgages. 

When the Fed lowers interest rates, variable-rate mortgages see an immediate reduction, making adjustable-rate mortgage payments more affordable. Additionally, borrowers can secure new fixed-rate mortgages at lower rates, offering significant savings compared to pre-cut conditions. 

Impact on First-time Homebuyers  

This week’s rate cut offers great opportunities for buyers and homeowners alike. If you’re a first-time homebuyer, you may qualify for lower mortgage rates and larger loans, making homeownership more attainable. Locking in a lower rate now can save you thousands in interest over time. However, increased borrowing power for others can heighten market competition, potentially driving up home prices. 

For homeowners with adjustable-rate mortgages (ARMs), rate cuts could lower your monthly payments, freeing up funds for other financial goals. If you hold a fixed-rate mortgage, refinancing could help you benefit from today’s lower rates. Additionally, rising buyer activity tends to boost home values, unlocking more equity in your property. 

Whether you plan to upgrade, downsize, or stay put, this added equity expands your financial options. From funding renovations with a HELOC to maximizing returns on a sale, today’s market environment is filled with possibilities. 

How Have Existing Rate Cuts Affected Real Estate 

This week’s announcement marks the second in a series of anticipated rate reductions, following a 0.5% cut in September 2024. If you haven’t noticed a swift market shift, that’s understandable. 

While rate cuts influence real estate, their effects often unfold gradually. Many realtors suggest these adjustments may already be reflected in current home values, requiring time—or further rate reductions—for noticeable changes in housing prices. Buyer sentiment also plays a crucial role. When buyers expect additional rate cuts, they might delay purchases, temporarily reducing demand and moderating price increases. 

How to Thrive for Success After a Rate Cut 

Real estate is influenced by numerous factors, and the effects of interest rate changes often take months or even years to fully unfold. The positive side is that this delay provides you with ample time to develop a well-thought-out plan. Take advantage of this opportunity to strategize effectively and consider these approaches as you chart your next steps. 

If you’re a first-time homebuyer 

Getting your finances in order allows you to act swiftly when shopping for homes and making offers. Connecting with a mortgage specialist can help you determine your budget and guide you in gathering the necessary documents for a smooth pre-approval process. This preparation ensures you’re ready to submit an offer as soon as you find the perfect home, increasing your chances of securing it. 

If you’re hoping to upsize or downsize 

Reach out to a mortgage specialist and a real estate professional to discuss your goals. A real estate expert can provide valuable market insights and estimate the current value of your home, while a mortgage specialist will help you understand how much home you can afford. Additionally, your mortgage specialist can connect you with other financial professionals who can assist in creating a personalized financial plan, including the best way to utilize the proceeds from selling your current home. 

If you’re staying in your current home 

A rate cut, even if you’re not planning to move, offers a great opportunity to reassess your financial strategy. It’s a good idea to consult with a financial advisor to explore how you can leverage your home equity and determine if a HELOC could help you achieve your financial goals. Additionally, refinancing your mortgage might provide valuable benefits, so discussing options to find a mortgage that aligns with your needs is worth considering. 

How the Fed Affects Mortgage Rates 

The Federal Reserve does not directly set mortgage rates, but its decisions influence them indirectly, unlike products such as savings accounts and CD rates. Mortgage rates typically follow the movement of 10-year Treasury yields. However, the Fed’s policies play a crucial role in shaping the overall trend for mortgage rates. Lenders and investors closely monitor the Fed’s actions, and their interpretations impact the cost of home loans. In 2022, the Fed raised rates seven times, causing mortgage rates to rise from 3.4% in January to 7.12% in October. In 2023, mortgage rates climbed even higher, briefly reaching 8%, but have since returned to around 7%. 

What Happens to the Housing Market When Interest Rates Rise? 

Record-low mortgage rates were key in driving the housing boom of 2020 and 2021, pushing the market into overdrive. However, when rates surged to their highest levels in two decades, the housing market slowed, yet prices remained elevated. In September, the median home price reached $404,500, just shy of June’s record high. Historically, home prices and sales are resilient to rising rates, as life events often drive home purchases regardless of rates. While high mortgage rates and steep price increases have impacted affordability, a potential decrease in rates could spark more demand, potentially exacerbating the housing shortage. 

Key Considerations for Borrowers Moving Forward 

Here are some expert tips for navigating volatile mortgage rates: 

Shop Around for a Mortgage 

Smart shopping can help you secure a better-than-average rate. With the refinance boom slowing down, lenders are eager to earn your business. 

Be Cautious with ARMs 

While adjustable-rate mortgages (ARMs) may seem appealing, borrowers should avoid them. The initial savings are minimal, just about half a percentage point in the first five years, while the risk of higher rates in the future is significant. Additionally, new adjustable mortgage products now adjust every six months instead of the traditional annual adjustments. 

Consider a Home Equity Loan or HELOC 

Although mortgage refinancing hasn’t gained momentum, many homeowners are choosing home equity lines of credit (HELOCs) to access their home equity. The reasoning is clear: If you need $50,000 for a kitchen renovation and have a $300,000 mortgage at 3 percent, it’s more cost-effective to avoid a new loan at 7 percent. Instead, you can maintain your 3 percent mortgage rate and use a HELOC, even if it carries a 10 percent interest rate.