What The Cut Means For Real Estate

The Federal Reserve just cut interest rates for the first time since the early days of the Covid pandemic. It's a big move, with many eyes now on how this will affect various parts of the economy. Especially real estate. While it’s easy to get caught up in the potential impacts, the reality is nuanced. Below we take a quick look at what this rate cut means for the real estate market as we head into 2025. And beyond.

A Look At The Fed's Decision

The Federal Open Market Committee (FOMC) lowered the key overnight borrowing rate by 50 basis points. This half-point cut was prompted by a weakening labor market and moderating inflation. The new rate now sits between 4.75% and 5%.

• First cut since early Covid pandemic.
• Lowers short-term borrowing costs for banks.
• Likely to influence mortgages, auto loans, credit cards.
• Fed signals possible additional cuts this year.

This cut aims to prevent further economic slowdown. It’s worth noting, though, that while it brings some immediate changes, the full impact on real estate might take a while to unfold.

Also Read: The Impact On Rates With Fewer Jobs Created Than Expected

The Fed Lowered Rates By 50 Basis Points

Impact On Mortgage Rates

Mortgage rates, while not directly controlled by the Fed, are closely linked to broader economic trends. Following the Fed’s policy shift, mortgage rates have already seen some adjustments.

• 30-year fixed mortgage rate decreased from 7.79% (October 2023) to 6.20%.
• Rates are expected to decline further, possibly nearing 6% by year-end.
• Potential to reach around 5.5% by the end of 2025.
• Mortgage Bankers Association, Fannie Mae, and other experts expect some further rate drops.

A drop in mortgage rates could improve housing affordability. But, it's not as simple as flipping a switch. Factors like employment stability and household incomes still play an important role in the real estate market market.

Existing Home Sales

With lower mortgage rates, housing affordability is expected to improve. This might help ease the 'lock-in effect' where homeowners hesitate to sell due to low-rate mortgages on their existing homes.

• Marginal improvement seen in mortgage purchase applications.
• If rates stay below 6% through 2025, more listings could appear.
• Potential for a rise in existing home sales, but gradual.
• Full return to pre-pandemic sales levels might take time.

The recent rate cut could eventually unlock new listings, but the process is slow. Homeowners still have to contend with economic uncertainty, and many are waiting for more favorable conditions.

Impact On Home Prices

Lower rates could create more activity in the housing market. However, this doesn’t automatically mean rising prices. Also, factors like inventory and demand vary by area.

• Mixed opinions on how rate cuts might affect home prices.
• Lower rates could ease the 'frozen' market due to the lock-in effect.
• Inventory levels will be a key indicator for pricing trends.
• Regional market dynamics will be a primary driver of price fluctuations.

With the housing market already facing supply challenges, it’s unclear if the current rate cuts will boost prices. Increased market turnover might not directly equate to price surges, especially if supply remains constrained.

Also Read: A Massive Wave Of Foreclosures Does Not Appear To Be Coming

Several More Rate Cuts Are Expected

A Spike In Refinancing Activity

The recent drop in mortgage rates has triggered a noticeable increase in refinancing applications. This is providing a bit of relief for homeowners locked into higher rates.

• Refinancing applications have increased as rates dropped closer to 6%.
• About 4 million homes have a refinance opportunity.
• Longer-term refinancing boom might be limited due to many homeowners already having rates below 5%.

The current spike is mostly driven by those who recently secured higher mortgage rates. A sustained boom in refinancing could be limited if rates don’t fall substantially below current levels.

A Complex Road Ahead

The Fed's decision to cut rates is an important development. However, it doesn't offer a straightforward path for the real estate market. The good news? mortgage rates are likely to continue falling. And this could make homeownership more affordable. However, factors like market stability and inventory levels will determine the actual outcome. For now, the real estate market is more set for gradual change rather than a rapid shift. As 2025 approaches, it will be interesting to see how many future rate cuts come our way.

Also Read: Housing Market Sees Renewed Interest As Mortgage Rates Drop