As we approach the next Federal Reserve meeting, the overwhelming expectation is that they will cut the Federal Funds Rate. This move is driven primarily by signs of cooling inflation and a slowing job market, leading many experts to believe a rate cut is imminent. Mark Zandi, Chief Economist at Moody’s Analytics, shared his perspective, saying:
“They’re ready to cut, just as long as we don’t get an inflation surprise between now and September, which we won’t.”
For both buyers and sellers in the housing market, a cut in the Federal Funds Rate can have significant implications. Here’s what you need to know about how these changes could affect the real estate landscape and your decisions moving forward.
Why the Federal Funds Rate Matters to You
The Federal Funds Rate is one of the primary influences on mortgage rates. While other factors such as economic conditions, inflation, and global geopolitical uncertainties also play a role, the Federal Funds Rate is a critical component. When the Fed cuts this rate, it sends a strong signal about the broader economy, which often triggers a response from mortgage rates.
However, a single rate cut isn’t likely to result in a dramatic drop in mortgage rates overnight. Instead, the effect is typically more gradual. Mike Fratantoni, Chief Economist at the Mortgage Bankers Association (MBA), explains:
“Once the Fed kicks off a rate-cutting cycle, we do expect that mortgage rates will move somewhat lower.”
This means that while the immediate effect of a Federal Funds Rate cut might not be substantial, it could contribute to a gradual decline in mortgage rates over time. And according to Lawrence Yun, Chief Economist at the National Association of Realtors (NAR), this isn’t a one-off situation:
“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
As we look toward 2025, experts in the housing industry predict that mortgage rates will continue to decline gradually. This ongoing reduction is expected to be influenced by the anticipated cuts from the Federal Reserve. Projections from industry leaders such as Fannie Mae, MBA, NAR, and Wells Fargo point to a steady decrease in mortgage rates as these rate cuts take effect.
This is good news for both homebuyers and sellers. Here are two key reasons why this potential decline in mortgage rates could positively impact the housing market:
1. Easing the Lock-In Effect for Sellers
For many current homeowners, the idea of selling their home and purchasing a new one has been unattractive due to the higher mortgage rates that followed their last home purchase. This phenomenon is known as the “lock-in effect.” Homeowners feel trapped in their current homes because selling would mean giving up their low mortgage rates and potentially taking on a higher-rate loan for their next home.
With the expected rate cuts, however, this lock-in effect could begin to ease. A moderate reduction in mortgage rates might make selling more appealing, as the cost of a new mortgage could be slightly lower than it has been in recent years. While this shift isn’t expected to bring a massive wave of new homes onto the market, it could help loosen the constraints some sellers have felt and lead to more inventory availability for buyers.
2. Encouraging More Buyer Activity
For buyers, the gradual decrease in mortgage rates will make homeownership more accessible. Even a slight drop in rates can significantly reduce the overall cost of financing a home, making monthly mortgage payments more affordable for many prospective buyers. This could lead to an increase in buyer activity as more people take advantage of the improved affordability.
If you’ve been waiting for mortgage rates to drop before entering the housing market, this may be the opportunity you’ve been hoping for. Lower rates can help reduce the long-term cost of homeownership and make it more feasible to purchase a home that meets your needs and budget.
Should You Act Now or Wait?
While the anticipated Federal Funds Rate cut is expected to contribute to a gradual decline in mortgage rates, it’s important to keep in mind that trying to perfectly time the market can be challenging. Waiting for the “perfect” moment to buy or sell often leads to missed opportunities. As Jacob Channel, Senior Economist at LendingTree, advises:
“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.”
This advice is particularly relevant in today’s market. If you’re in a financial position to buy or sell and the current market conditions align with your personal goals, it may be wise to act sooner rather than later. The gradual decline in mortgage rates could open up more opportunities for you, but waiting indefinitely could result in missed chances.
Bottom Line
The expected cut to the Federal Funds Rate, driven by easing inflation and a slowing job market, is likely to have a positive impact on the housing market, particularly through gradual reductions in mortgage rates. Whether you’re considering selling your current home or buying a new one, this shift could help unlock new possibilities.
If you’re ready to explore your options, it’s a good idea to connect with a local real estate agent. They can provide insights on the latest market trends and help you make informed decisions based on your specific circumstances. With the right guidance, you can take advantage of the opportunities this evolving market presents.