On September 18th, 2024, the Federal Reserve (FED) cut its benchmark interest rate, a welcome sign for both the economy and the real estate market. While the FED rate doesn’t have a direct impact on mortgage rates, it influences them. Mortgage rates already had fallen sharply over the past 11 months, going all the way from 8.01 percent in October 2023 to 6.20 percent as of September 18th. The FED rate refers to the interest banks charge each other for overnight loans. When the FED cuts rates, borrowing costs generally fall. For home buyers, this means they may see more favorable rates, making homeownership slightly more affordable.
What Exactly is the FED Rate?
The FED rate is a critical tool the Federal Reserve uses to control inflation and stimulate economic growth. This rate is the interest rate that banks charge each other when lending reserve balances overnight, essentially acting as the rate banks use to borrow money from one another to meet reserve requirements set by the Federal Reserve. A lower rate reduces the cost of borrowing for banks, which often translates into lower interest rates for consumers on things like car loans and credit card balances. By cutting the rate, the FED aims to encourage spending and investment by making it cheaper for consumers to borrow.
How Does It Affect Mortgage Rates?
While the FED rate doesn’t directly set mortgage rates, and their decisions don’t effect mortgages as directly as they do things like savings accounts and CD rates, it strongly influences them. Mortgage rates tend to move with 10-year Treasury yields, and the general trend of interest rates in the economy. When the FED lowers rates, it generally puts downward pressure on mortgage rates, making it more affordable for home buyers to borrow money for a home. Lower mortgage rates mean lower monthly payments, which could open the door for more buyers to enter the housing market or allow buyers to afford more expensive homes.
What Can Home Buyers Expect?
With the recent FED rate cut, home buyers have already seen a dip in mortgage rates, which lenders had already taken into account before the official rate cut announcement on September 18th. In the weeks before the FED meeting, rates began to drop, seeing their lowest levels in two years. This reduction signals that rates will likely continue to drop, and potentially increasing buying power. However, buyers should be aware that other factors, such as inflation, demand, and housing inventory, still play a significant role in the overall cost of purchasing a home. The biggest hurdle continues to be that home prices are unlikely to drop with lower interest rates due to pent-up demand. It’s essential to stay informed and act swiftly if you’re in the market, as it is probably that these rate cuts will create a competitive environment for buyers looking to capitalize on more affordable loans.
If you’re looking to buy a home in the next year, it’s a good idea to get connected with a local, qualified lender who can set you on the right path for when you’re ready to make a move. The Phipps Team has an excellent list of lenders to share – reach out to us today and we’ll send our contacts over to you!