The Federal Reserve’s recent decision to cut its benchmark interest rate by half a percentage point has sent ripples through the housing market, offering a glimmer of hope for homebuyers. This unexpected move, described by Bill Banfield, chief business officer at Rocket Companies, as giving “a little extra,” comes at a time when mortgage rates have already seen a significant decline over the past year.

According to Bankrate’s national survey of large lenders, mortgage rates have fallen from 8.01 percent in October 2023 to 6.20 percent as of September 18. This shift by the Federal Reserve could potentially invigorate the housing market, encouraging both buyers and sellers to engage more actively.

Lisa Sturtevant, chief economist at Bright MLS, notes that declining interest rates are particularly beneficial for homebuyers facing affordability challenges. She anticipates that this reduction in borrowing costs will not only fuel demand but also increase the supply of homes available for sale, thereby stabilizing home prices in various local markets.

The Federal Reserve and the Housing Market

The Federal Reserve’s earlier rate hikes had a cooling effect on the housing market, leading to a sharp drop in home sales while pushing home prices to record highs. Now, with inflation on the decline, the Fed’s policy shift represents a pivotal moment in monetary policy.

Mike Fratantoni, chief economist at the Mortgage Bankers Association, suggests that if mortgage rates remain near current levels, the housing market could experience a stronger-than-usual fall season, with a potential rebound in activity next spring.

How the Fed Affects Mortgage Rates

Although the Federal Reserve does not directly set mortgage rates, its policies significantly influence them. Mortgage rates typically move in tandem with 10-year Treasury yields. The Fed’s actions set the overall tone, impacting how much consumers pay for home loans.

Historically, low mortgage rates have fueled housing booms, as seen in 2020 and 2021. However, when rates surged to levels unseen in two decades, the market slowed dramatically. Despite this, home prices reached unprecedented levels, with the nationwide median existing-home price hitting $422,600 in July, close to the all-time high of $426,900 in June.

Fratantoni points out that elevated mortgage rates and steep home-price growth have significantly reduced affordability. Yet, as rates decline, affordability could improve, potentially drawing more buyers into the market.

Next Steps for Borrowers

• Shop around for a mortgage: Conducting an online search can help find lenders offering lower rates and competitive fees. Savvy shopping can save thousands of dollars.
• Be cautious about ARMs: Adjustable-rate mortgages might seem tempting, but they come with the risk of higher future rates. Borrowers should avoid using ARMs as a crutch for affordability.
• Consider a home equity loan or HELOC: Homeowners can tap into their home equity with a HELOC, which might be more cost-effective than refinancing at higher rates.