For the first time in more than four years, the Federal Reserve cut interest rates in a move that was long anticipated in response to cooling inflation in the U.S. economy and the need to lower borrowing costs.
The half-point cut brought the range to 4.75%-5%, signaling a relatively aggressive approach from the Fed to wind down from a 23-year high.
One of the first considerations for this shift is how it will affect mortgage rates in the U.S. and whether that will translate to noticeable improvements in housing affordability.
Some analysts are tempering expectations that this rate cut will have a near-term effect on mortgage rates. The reason is that it’s likely mortgage rates already have been coming down because the Fed’s move was expected.
Long-term fixed-rate mortgages averaged 6.2% this week, the lowest since February 2023 and far below the nearly 8% mark that was reached last year.
Wells Fargo senior economist Charlie Dougherty said the bank’s forecast for the rest of this year has rates sticking around 6.2%, NPR reported. By the end of next year, they could come down to about 5.5%, which is about where they stood during the spring housing market in 2022. That’s still well above the historically low rates that dipped under 3% during the COVID-19 pandemic in 2020 and 2021.
Although it’s often assumed that lower mortgage rates will translate to more affordable homes, the opposite can sometimes be true in the short-run. Falling mortgage rates attract more buyers back into the market, increasing competition for homes and pushing prices upward due to demand. At the same time, it’s likely that more homes will be listed for sale as current homeowners looking for new properties will be enticed by the lower rates, too.
Dougherty told NPR that home prices have risen about 50% since 2020. As of the second quarter of this year, the median home sales price in the U.S. stood at about $412,000, a decrease of above 3.4% from the previous quarter. While that’s an encouraging trend for buyers, many will find that the high cost of homes balances out gains in affordability from lower mortgage rates pushing down monthly premiums.
Still, for some buyers, it could translate to several hundred dollars a month in savings compared to buying at a higher rate.
Mortgage lenders likely will take time to adjust to the Fed’s action, easing rates down in an effort to attract borrowers while sustaining profitability with lower premiums, CBS News reported.
To many home buyers, the Fed’s move will be a welcome signal that an unforgiving market is starting to loosen up. But timing will continue to be a challenge for buyers who hope to navigate the pressures of increasing demand and how home prices will adjust.
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