Interest Rate Cuts on the Horizon: What Homebuyers and Owners Need to Know
The Federal Reserve is poised to make its first interest rate cut in years this fall, signaling a potential shift in the housing market. This move, which could come as early as September, has many homebuyers and existing homeowners eager to understand its implications on mortgage rates and their financial decisions. While mortgage rates are primarily influenced by Treasury yields and the overall economy, the Fed’s interest rate policy plays a significant role.
Key Takeaways:
- Rate cuts are already priced into the market: Financial markets, especially the bond market, are already anticipating interest rate cuts, meaning there might be little noticeable immediate effect on mortgage rates.
- Refinance opportunity: Homeowners with higher mortgage rates from the recent peak in 2023 might see an opportunity to refinance, but they should wait until the Fed is further along in its cutting cycle to maximize potential savings.
- Impact on homebuyers: Lower borrowing costs could encourage more homebuyers to enter the market, potentially leading to increased demand and potentially higher prices, offsetting some of the benefits of lower mortgage rates.
Rate Cuts Already Priced In
The possibility of interest rate cuts has been factored into the market, particularly in the bond market, according to Chen Zhao, lead economic researcher at Redfin. This suggests that the initial rate cut might not significantly impact mortgage rates, as the market has already adjusted in anticipation of the Fed’s action.
"A lot of these rate cuts are already priced in," said Zhao.
Indeed, the 30-year fixed-rate mortgage has already fallen to 6.78% on July 25th, down from 7.22% on May 2nd, according to Freddie Mac data.
Should Homeowners Refinance Now or Wait?
With the first rate cuts expected in the coming months, homeowners are naturally considering whether it’s a good time to refinance. While refinance activity has already shown signs of increasing, some experts advocate for patience.
“Refinancings are starting to tick up, it’s not a huge wave yet, but they are starting to pick up a little bit as rates start coming down," said Zhao.
The Mortgage Bankers Association reported a 15% increase in refinance activity from the previous week, reaching the highest level since August 2022. However, whether refinancing is advantageous depends on each homeowner’s individual circumstances, particularly their existing interest rate.
For homeowners who took out mortgages at the peak of rates last fall, when rates reached 8%, there might be an opportunity to refinance and potentially lower their monthly payments. However, to truly benefit from refinancing, homeowners need to see a significant drop in mortgage rates, ideally at least 50 basis points below their current rate.
"There are people that originated when mortgages peaked at 8% in the fall of last year," said Selma Hepp, chief economist at CoreLogic. For those buyers, "there is some opportunity there."
While a 50-basis-point decrease might seem like a good benchmark, it’s not a rigid rule. The decision to refinance depends on factors like your existing mortgage payment, the potential savings compared to closing costs, and your overall financial situation.
"The saving has to outweigh your upfront costs," Zhao explained.
Even if you have a high existing mortgage rate, consider waiting until the Fed is further along in its cutting cycle. With many experts predicting continued rate declines throughout the year and into 2025, waiting might offer even greater potential savings.
“There’s a lot of variability.” said Jacob Channel, senior economist at LendingTree, emphasizing the importance of working with lenders to determine the best refinancing strategy based on your circumstances.
Buy Now or Wait For Lower Rates?
While lower mortgage rates could offer relief for homebuyers struggling with affordability, the long-term impact on the housing market is uncertain. The Fed’s rate cuts could stimulate demand, potentially leading to higher prices, offsetting the benefits of lower borrowing costs.
"If borrowing costs for home loans come down, there’s a chance more buyers will jump in the market," said Zhao. "And if demand outpaces supply, prices might go up even more."
The ultimate outcome of the Fed’s actions on the housing market depends on the magnitude of rate decreases, the level of housing supply, and other economic factors.
"Timing the market is basically impossible," said Channel. "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."
A Time of Uncertainty for the Housing Market
With interest rate cuts on the horizon and their potential impact on mortgage rates and the overall housing market still unclear, both homeowners and potential buyers are facing a period of uncertainty.
For those considering refinancing, it might be wise to carefully assess their individual situation, research refinancing options, and consider waiting for a more substantial drop in rates. For prospective homebuyers, the decision to enter the market will ultimately depend on their personal financial circumstances and a careful evaluation of the current housing market conditions. While lower rates might present opportunities, it’s essential to understand the potential for increased demand and higher prices, which could offset the benefits of lower borrowing costs.
The coming months will undoubtedly be crucial for the housing market as the Fed’s actions unfold, and the ability to adapt to evolving conditions will be crucial for navigating the complex decisions surrounding homeownership.
