The Fed’s 0.50% rate cut on Sept. 18 has sparked hope of lower mortgage rates — and possibly cheaper house prices. As of Sept. 19, according to data from Freddie Mac, the average 30-year fixed-rate mortgage in the U.S. was 6.09%, down from 7.19% one year ago.
Lower mortgage rates are always good news for home buyers, because a lower APR means you can get a lower monthly payment on your housing costs. But Americans have more than one reason to root for lower mortgage rates. Lower mortgage rates could help get the housing market unfrozen, and maybe help home prices get more affordable.
Let’s look at a few reasons why anyone who wants to buy a home in 2024 or 2025 should be rooting for Fed rate cuts to lead to lower mortgage rates.
Why Americans are hoping for lower mortgage rates
For the past two years, the U.S. housing market has largely been “frozen” in place — home sales have declined, but home prices have gone up. According to National Association of Realtors (NAR) market survey data, existing home sales dropped by about 40% between February 2022 and August 2024, but median home prices have gone up by about 15%.
This “frozen” housing market is good news for existing homeowners who are building equity, but it’s bad for home buyers. Lack of housing supply, high prices, and high mortgage rates have created frustrating conditions for anyone who would love to buy a home.
“I have honestly never experienced a market like this in my 40 years in the industry,” said Carolyn Morganbesser, Associate Vice President of Mortgage Originations at Affinity Federal Credit Union. “There’s nothing to compare it to.”
Lack of home purchases is also bad for business for any companies that are in the industry of building, selling, and financing homes. Lower mortgage rates could be good for the overall U.S. economy, by spurring more home construction and housing development.
When could lower interest rates make housing cheaper?
Even though the Fed’s 0.50% interest rate cut was bigger than many experts had expected, mortgage rates have not come down dramatically. There’s no guarantee that mortgage rates will drop below 6% anytime soon; mortgage rates do not always directly follow the direction of Fed interest rate decisions.
However, if the Fed continues to cut interest rates (as it has forecasted) by another 0.50% in November-December 2024, and by another 1.00% in 2025, there is reason for optimism for the housing market. If mortgage rates go down by another 1%, this could increase the supply of homes by spurring more new housing construction and incentivizing more existing homeowners to put their homes on the market.
Housing costs would not necessarily get cheaper with lower interest rates. Even if supply of housing increases, demand for housing could also increase. But lower mortgage APRs could give more prospective home buyers affordable monthly payments, and help them feel more confident to make an offer on the home of their dreams.
“If interest rates reach the 5% range, we could see an increase in existing home listings to stimulate the housing market,” said Carolyn Morganbesser. “In my opinion, the cost of housing will remain at its current levels until there is more inventory available on the market. Currently, with so little to choose from, sellers have no incentive to lower the price of their home.”
Bottom line
If you’re hoping to buy a home in 2024 or 2025, the Fed’s interest rate cuts might help make your life easier. Every local housing market is different and each situation is unique. Don’t expect a massive overnight difference in home affordability. But if interest rates go down by another 1% within the next year, your ability to get an affordable mortgage might improve significantly.
