How the Federal Reserve’s Next Move Could Impact the Housing Market

How the Federal Reserve’s Next Move Could Impact the Housing Market

With September here, attention is focused on the Federal Reserve (the Fed). The prevailing expectation is that they will reduce the Federal Funds Rate at their upcoming meeting, largely due to recent indications that inflation is easing and the job market is slowing. Mark Zandi, Chief Economist at Moody’s Analytics, stated:

“They’re ready to cut, just as long as we don’t get an inflation surprise between now and September, which we won’t.”

So, what does this mean for the housing market and, more specifically, for you as a potential homebuyer or seller?

Why a Federal Funds Rate Cut Matters

The Federal Funds Rate is a crucial factor influencing mortgage rates, though other elements like the economy and geopolitical uncertainties also play a role.

When the Fed lowers the Federal Funds Rate, it reflects broader economic conditions, and mortgage rates typically adjust in response. Although a single rate cut may not cause a dramatic drop in mortgage rates, it could contribute to the ongoing gradual decline.

As Mike Fratantoni, Chief Economist at the Mortgage Bankers Association (MBA), notes:

“Once the Fed kicks off a rate-cutting cycle, we do expect that mortgage rates will move somewhat lower.”

And any upcoming cut to the Federal Funds Rate is likely to be part of a series of reductions. Lawrence Yun, Chief Economist at the National Association of Realtors (NAR), explains:

“Generally, the rate-cutting cycle is not one-and-done. Six to eight rounds of rate cuts all through 2025 look likely.”

The Projected Impact on Mortgage Rates

Here’s what industry experts project for mortgage rates through 2025. One factor contributing to this gradual decline is the expected cuts from the Fed. The graph below displays the latest forecasts from Fannie Mae, MBA, NAR, and Wells Fargo (see graph below):

With recent improvements in inflation and indications of a cooling job market, a Federal Funds Rate cut is expected to result in a moderate decline in mortgage rates (as shown by the dotted lines). Here are two major reasons why this is beneficial for both buyers and sellers:

1. It Helps Alleviate the Lock-In Effect

For current homeowners, lower mortgage rates could alleviate the lock-in effect, where people feel stuck in their current homes because today’s rates are higher than their existing rate.

If the concern about losing a low-rate mortgage and facing higher costs has kept you from selling, a slight decrease in rates might make selling more appealing. However, this change is not expected to result in a surge of sellers, as many homeowners may still be reluctant to give up their favorable mortgage rates.

2. It Should Boost Buyer Activity

For potential homebuyers, a drop in mortgage rates will make the housing market more attractive. Lower mortgage rates can decrease the overall cost of homeownership, making it more feasible for you if you’ve been waiting to make a move.

What Should You Do?

Although a Federal Funds Rate cut is not expected to lead to a dramatic drop in mortgage rates, it will likely contribute to the ongoing gradual decrease.

While this anticipated rate cut is a positive development for the future of the housing market, it's important to evaluate your options right now. As Jacob Channel, Senior Economist at LendingTree, summarizes:

“Timing the market is basically impossible. If you’re always waiting for perfect market conditions, you’re going to be waiting forever. Buy now only if it’s a good idea for you.”

Bottom Line

The anticipated Federal Funds Rate cut, influenced by improving inflation and slower job growth, is expected to have a positive, albeit gradual, effect on mortgage rates. This could create new opportunities for you. When you're ready, let’s connect so you can be prepared to take action at the right moment.