How the Federal Reserve’s Next Move Could Impact the Housing Market

As September unfolds, all eyes are on the Federal Reserve (the Fed) and their upcoming decisions. The expectation is that they’ll cut the Federal Funds Rate at their next meeting, driven by signs that inflation is cooling and the job market is slowing. Mark Zandi, Chief Economist at Moody’s Analytics, notes:

“They’re ready to cut, just as long as we don’t get an inflation surprise between now and September, which we won’t.”

But how could this decision affect the housing market, and more importantly, what does it mean for you as a potential homebuyer or seller?

Why a Federal Funds Rate Cut Matters

The Federal Funds Rate is a key factor that influences mortgage rates, along with other elements like the economy and geopolitical uncertainty.

When the Fed cuts the Federal Funds Rate, it signals changes in the broader economy, and mortgage rates often respond. While a single rate cut might not lead to a dramatic drop in mortgage rates, it could contribute to the ongoing gradual decline we’ve been seeing.

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 likely won’t be a one-time event. Lawrence Yun, Chief Economist at the National Association of Realtors (NAR), predicts:

“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

Here’s what experts in the industry project for mortgage rates through 2025. One contributing factor to this ongoing gradual decline is the anticipated cuts from the Fed. The graph below shows the latest forecasts from Fannie Mae, MBA, NAR, and Wells Fargo (see graph below):

So, with recent improvements in inflation and signs of a cooling job market, a Federal Funds Rate cut is likely to lead to a moderate decline in mortgage rates (shown in the dotted lines). Here are two big reasons why that’s good news for both buyers and sellers:

1. It Helps Alleviate the Lock-In Effect

For current homeowners, lower mortgage rates could ease the lock-in effect. This is where homeowners feel stuck because today’s rates are higher than what they locked in when they bought their current house.

If you’ve been hesitant to sell because of higher rates, a slight reduction could make selling more attractive. However, many homeowners might still be cautious about giving up their existing mortgage rate.

2. It Should Boost Buyer Activity

For potential homebuyers, any drop in mortgage rates will provide a more inviting housing market. Lower mortgage rates can reduce the overall cost of homeownership, making it more feasible for you if you’ve been waiting to make a move.

What Should You Do?

While a Federal Funds Rate cut is not expected to lead to drastically lower mortgage rates, it will likely contribute to the gradual decrease that’s already happening.

And while the anticipated rate cut represents a positive shift for the future of the housing market, it’s important to consider your options right now. Jacob Channel, Senior Economist at LendingTree, sums it up well:

“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.”

Bottom Line

The expected Federal Funds Rate cut, driven by improving inflation and slower job growth, is likely to have a gradual, positive impact on mortgage rates. This could unlock opportunities for you. When you’re ready, let’s connect to ensure you’re prepared to take action when the time is right for you. Contact Beth Van Zee, your trusted Realtor in Iowa.