What Does the Fed Rate Cut Mean for the Housing Market?

The Federal Reserve lowered its influential federal funds rate by half a percentage point, marking a significant step in its efforts to manage economic growth and stabilize inflation. For the housing market, this decision carries a ripple effect, influencing everything from mortgage rates to housing inventory and buyer demand.

Here’s a closer look at what the Fed’s rate cut means for the housing market and why now might be the time to act if you’re considering buying or selling a home.

How the Fed Funds Rate Influences Mortgage Rates

The federal funds rate is the interest rate at which banks lend to one another overnight, and while it doesn’t directly dictate mortgage rates, the two are closely related. Mortgage rates are influenced by several factors, including the 10-year Treasury yield, market expectations, and the Fed's rate decisions.

Recent market activity suggests that much of the Fed's decision was already priced into mortgage rates before the official announcement. Mike Fratantoni, Chief Economist for the Mortgage Bankers Association, explained, “Mortgage rates likely had this cut—and this expected rate path—priced in.”

Even so, the Fed’s pivot signals a longer-term trend toward lower borrowing costs. Economists predict that mortgage rates will gradually decline over the next year as inflation continues to ease and the Fed implements further cuts.

Lower Rates Could Unlock Housing Inventory

One of the biggest challenges in the housing market today is a lack of inventory. Many homeowners locked in ultra-low mortgage rates during 2020 and 2021 and have hesitated to sell, as moving would mean giving up those rates for a new loan with a much higher rate.

This so-called "lock-in effect" has reduced the number of homes available, driving up competition and keeping prices high. With borrowing costs expected to decline in the coming months, some of these homeowners may finally list their properties, easing the inventory crunch.

Bill Adams, Chief Economist for Comerica Bank, highlighted the potential impact: “With the Fed pivoting, interest rates will be substantially lower over the next six to twelve months. That is very welcome news for credit-sensitive sectors of the economy like housing.”

Will Prices Drop Alongside Rates?

A decline in mortgage rates could have mixed effects on home prices. Initially, a gradual increase in supply might stabilize or lower prices, particularly in markets where affordability has been a challenge. However, as rates fall and more buyers enter the market, demand could outpace supply once again, driving up prices.

Ralph McLaughlin, Senior Economist at Realtor.com, noted, “The trajectory of rates over the coming months will be largely dependent on three key factors: (1) the performance of the labor market, (2) the outcome of the presidential election, and (3) any possible reemergence of inflationary pressure.”

In the short term, these dynamics mean sellers who act now may benefit from a market where competition among buyers remains strong due to limited inventory.

Economic Conditions Shaping the Fed’s Decisions

The Federal Reserve’s decisions are guided by three primary economic indicators:

1. Inflation Trends: While inflation has come down significantly from its peak, it remains above the Fed’s target of 2%. The Fed’s rate cuts aim to strike a balance between fostering economic growth and preventing inflation from spiking again.

2. Labor Market Health: Job growth has slowed in recent months, signaling a cooling labor market. This gradual slowdown aligns with the Fed’s goal of a balanced economy.

3. Unemployment Rates: At 4.1%, unemployment remains low, indicating a strong labor market even amid fewer new jobs. A healthy job market supports consumer confidence, which is crucial for housing activity.

   Why Acting Early Could Be Key

   For buyers, waiting for significantly lower mortgage rates may come with risks. As affordability improves, more buyers are likely to re-enter the market, creating increased competition. For sellers, listing now could mean capitalizing on strong demand and limited competition from other properties.

   According to industry experts, mortgage rates are expected to ease gradually through 2024 and 2025, but immediate, significant declines are unlikely. As a result, market participants should prepare for a transitional period where both opportunities and challenges exist.

   
   

   Bottom Line

   The Fed’s recent rate cut is a promising sign for the housing market, signaling relief for buyers and sellers alike. However, the road ahead may include periods of volatility. Staying informed and making strategic decisions now can help you capitalize on the opportunities this evolving market has to offer.

   Whether you're planning to sell or looking to buy, partnering with a trusted professional can make all the difference in navigating this complex environment. 

   If you’re planning to sell soon, now is the perfect time to position yourself for success. Connect with Kevin to create a tailored success plan that takes advantage of current market dynamics and ensures your home stands out. Call or text at 415.283.7919 or email Kevin at Kevin@PickettRealEstateGroup.com 

   
   

   San Mateo County Rolling 3-Month Data

Below, our data is based on averages for Single-family homes in San Mateo County over the last 90 days (August to October 2024). This data was gathered on November 06, 2024. 

San Mateo County Market Report

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