Understanding the Federal Reserve's Rate Cut: Implications for Home Buyers and Sellers

The Hidden Costs of Waiting: Why Delaying Your Home Purchase Until Spring Could Backfire

Attention homebuyers! If you've been waiting for the perfect time to purchase a home, this fall might just be your golden opportunity. In recent years, spring has been touted as the ideal season for house hunting, with a surge of listings hitting the market. However, the current market conditions are creating a unique window of opportunity for buyers, making this fall a standout season.

If you're considering buying a home, waiting until spring could mean facing higher rates, fewer options, and tougher competition. Take advantage of the current market conditions and explore your options this fall.

According to Realtor.com, the week of September 29 to October 5 is predicted to be the best time to buy a home in 2024. Danielle Hale, chief economist at Realtor.com, explains that during this period, buyers can expect an optimal mix of abundant options and potential savings on list prices, creating some of the most favorable market dynamics in years.

So, what factors are contributing to this buyer-friendly season? Let's dive into the details.

The Fed’s Decision and Mortgage Rates

On September 18, 2024, the Federal Reserve, under Chair Jerome Powell, announced a significant policy shift, cutting interest rates by 0.5%. This marks the first rate reduction in four years and signals the beginning of a rate-cutting cycle that could lead to further cuts by year-end. But how does this impact the real estate market, particularly for home buyers and sellers?

Firstly, mortgage rates have recently dipped to their lowest levels since February 2023, falling to 6.11% on September 11. This decline offers buyers the chance to secure more favorable rates and save significantly on their monthly payments. However, it's important to note that mortgage rates can be unpredictable, so acting now could be the key to securing a great deal.

Secondly, if you've been holding out for more housing options, your patience is about to pay off. Compared to the same time last year, the number of homes for sale increased by 22.1% in August. Realtor.com predicts that the first week of October will likely feature 37% more active listings than at the start of the year, providing buyers with a wide selection of properties to choose from. This increase in inventory means more opportunities to find your dream home without the pressure of making a hasty decision.

Thirdly, with the fall season traditionally experiencing a cooling in buyer demand, competition is expected to drop by nearly 30% compared to the spring peak. This reduction in competition could give you an advantage in negotiations, whether it's offering below the asking price or requesting that the seller cover some of your closing costs.

Lastly, in a market with more inventory and less competition, sellers are often more motivated to make deals happen. In August, 25.9% of listings nationwide experienced price cuts, compared to 23.4% a year ago. Additionally, the number of homes sold above their list price has dropped from 33% last year to just 27.9% in the four weeks ending September 8. This means that sellers are more willing to negotiate, giving you the opportunity to purchase a home for less than you might have expected.

While the Federal Reserve doesn't directly set mortgage rates, its actions heavily influence financial markets. Consequently, mortgage rates have responded to the Fed’s decision, dropping from 7.79% in October 2023 to around 6.20% in September 2024. This decline is beneficial for prospective homebuyers, potentially boosting their purchasing power.

While fall is often considered a slower season for real estate, it can be a strategic time to buy. Many sellers are eager to close deals before the holiday season, making them more open to negotiations. This, combined with lower mortgage rates, increased inventory, reduced competition, and greater negotiating power, makes this fall a rare and advantageous time for homebuyers.

Buying Power and Affordability

A lower mortgage rate can significantly enhance a buyer’s purchasing power. For instance, a 1% drop in rates allows buyers to afford a home that is $70,000 more expensive while maintaining the same monthly payment. Additionally, buyers are enjoying considerable savings on their monthly payments—about $300 less than in May 2024 and $340 less than in October 2023, assuming a 20% down payment on a typical home.

If you’re ready to buy a home, you should get started on the process. The first thing you should do is talk to a lender to see how much you can afford. The lender will look at your income, credit, and down payment to determine the loan amount you qualify for.

If your loan officer is able to pre-qualify for you, you should go one step further by getting fully pre-approved. You will be viewed much more seriously by a potential seller - it can almost be close to being a cash buyer. Pre-approval means you're approved and ready to buy, all you need is to choose the home, get your home inspection done, and get the appraisal. If the seller agrees, it could make the closing quicker.

After you know how much you can afford, you should decide what type of home you want to buy. You should also think about what features you want in a home and where you want to live. The more specific you can be about what you want, the easier it will be to find the right home.

Future Trends in Mortgage Rates

Experts anticipate a gradual decline in mortgage rates, though not a sharp drop. Immediately after the Fed’s announcement, rates did inch up slightly from 6.15% to 6.17%, reflecting market adjustments. However, forecasts from economic experts like Mark Zandi of Moody’s and organizations like Fannie Mae suggest that rates could approach 6.0% by the end of the year and potentially settle around 5.5% by late 2025.

There were predictions that rates will get into the 5% range by the end of this year. This might not sound low enough for you. I don't know if we'll be seeing the past low rates in the 2%+, 3%, and 4% ranges anytime soon. If you are waiting for that to happen then you'll be stuck renting or living in your current home (that might not be working for you), for a long time.

It will be interesting to see how the upcoming election will affect rates.

The "Lock-In Effect"

The phenomenon known as the "lock-in effect" has constrained housing supply, as homeowners with pandemic-era low mortgage rates have been reluctant to sell and face higher rates on new mortgages. As mortgage rates decrease, this lock-in effect may diminish, leading to increased housing inventory. However, the broader impact on market dynamics remains uncertain, given that selling homeowners often become buyers as well.

I didn't think I'd ever see rates in the 2-3% range. I predicted this would happen, although I didn't term it "Lock-in Effect." We paid 10.5% interest for our first house. Of course, it was a starter home in the early 70's that was priced less than most cars today. But then again, we earned a lot less. The mortgage on that cute little 3-bedroom house was less than the rent we paid on a 2-bedroom apartment just prior.

More important was the equity we built in a short time frame. Instead of paying a landlord without any tax benefits (at the time we could write off the interest paid on not only a mortgage but also on credit cards!) and zero equity, we came out ahead quickly as the real estate market jumped while we were living there. It allowed us to move into a larger house within 3 years.

Home Prices and Market Supply

One of the major questions is how lower mortgage rates will affect home prices. While more buyers entering the market can drive demand, the real challenge lies in the inadequate housing supply. Even with the potential increase in sellers due to reduced mortgage rates, inventory constraints will continue to play a crucial role in determining home prices.

Although in some areas we are seeing price reductions as the market is evening out and it's no longer a seller's market, low rates always bring the buyers out and if homes are getting multiple offers, prices will increase. Will it be as bad as our past Seller's Market even though rates won't be as low? I don't think so, as some buyers will continue to be priced out with high prices and high rates, even if they fall to the 5% range.

The best homes on the market in their price range might get multiple offers, and some buyers will have to find something else. There are going to be other buyers who don't like what they can get for what they're qualified for. Our first house wasn't our dream home by any means, but we made it into a cute place with some love and sweat (we didn't shed any tears).

Your first home should be seen as a stepping stone to move up in the housing market. You might not be able to afford a single-family home in Scottsdale, for instance, but maybe you can afford a nice condominium. Or, start in a less expensive area. But at least get your foot in the door, literally, so you can feel the pride of homeownership and build up equity to be able to move up to your next place.

I believe we'll be seeing the "Lock-in Effect" mentioned above for quite some time. This doesn't affect affluent cash buyers as they aren't beholden to a mortgage. But there will be homeowners who took advantage of those low interest rates won't put their home on the market unless they absolutely have to move. Until that time, they will stay put with their low rates.

Conclusion

The Federal Reserve's rate cut is a significant development for the housing market, creating new opportunities for both buyers and sellers. While the long-term impacts are difficult to predict with precision, staying informed and understanding these changes can help you make strategic decisions in real estate. If you want to explore how these shifts affect your specific situation, consider contacting me for personalized advice. Give me a call or send a text to 480-906-1500, send an email to judyorr@judyorr.com, or use the Contact Form.