THE FED’S LONG-AWAITED RATE CUT
What It Means for Homebuyers and the Future of Housing Prices
February 18th marks the most recent interest rate cut from the Federal Reserve since the Covid-19 pandemic. This long-awaited reduction lowers the benchmark interest rate from 4.75%-5%, a half-point reduction from its previous point. A half-point decrease this soon in the year has surpassed expectations for some in the market, as just a few months ago, the Fed predicted rates to drop only one-quarter of a point for 2024.
While the Fed may have surprised some people with this move so soon in the year, it likely won't be the end of it for 2024. The new Fed dot plot released by the Federal Reserve predicts another half-percentage point decrease in the Federal Funds rate by the end of 2024. It's now clear that inflation is in a spot that the Fed feels comfortable with, and they don't plan on moving slowly in response to it.
What does this mean for the Residential Real Estate Market?
The first place everyone's eyes go to when attempting to understand the effects of a rate cut on residential real estate is the 30-year fixed mortgage rate. Interestingly enough, mortgage rates, in particular, weren't incredibly affected by this cut; in fact, they have been on the decline for several months in anticipation of the cut.
The day after the Fed announced its plan, the 30-year fixed mortgage rate endured a six basis point decrease from 6.15% to 6.09%, but soon after went back up to 6.18%, according to the Federal Reserve Bank of ST. Louis. This minuscule reduction directly following the Feds cut reveals how much expectations have affected mortgage rates up to this point. Given that expectations have such strong effects on the market, there are reasons to expect a continuation of the sustained fall in the 30-year fixed mortgage rate since the Fed is expecting more rate cuts by the end of the year, further adding to expectations.
While the Fed's decision may not have heavily impacted mortgage rates at the time, mortgage applications indeed were. The week of the Fed's announcement, total mortgage application volume surged by 14.2% compared to the week prior, according to the Mortgage Bankers Association's seasonally adjusted index. Such an increase is quite staggering, but it's important to note the makeup of this percentage. Applications to refinance an existing home loan rose by 24% in the same time frame, making up a large portion of the increase in total loan applications. On the other hand, applications for a mortgage to purchase a home only increased by a measly 5%.
Why is there such a large difference between loan applications?
The disparity between these numbers may seem surprising, but they have a reason. Those who have purchased homes over the past couple of years have likely been earnestly awaiting these cuts since their purchase occurred during a time of immensely high mortgage rates. So, it makes sense to see these people immediately pull the trigger and attempt to lower their mortgage payments by applying to refinance the loans on their homes so they can finally take advantage of lower interest rates. The slight increase in applications to purchase a home can be explained differently. It is likely that mortgage rates haven't yet dropped to the degree that many homebuyers want, as many buyers have been waiting years for rates to fall so they can finally purchase a home. Those stubborn enough to wait this long until the market tipped in their favor are likely willing to wait the extra couple of months for rates to get to where they want them since they aren't already suffering financially compared to those who purchased homes in the past couple of years.
Interest rates finally dropping is widely accepted to be a good thing for the residential housing market. On the other hand, it's crucial to think about how this may affect the median sales price of households sold in the United States. In the second quarter of 2024, this number was a staggering $412,300, according to the Federal Reserve Bank of ST. Louis.
This price is point immensely high, as it has seen a 30% increase in four years. With applications mortgages to purchase a home remaining low, it leads one to speculate what the demand for housing may look like in the near future as rates continue to fall.
Suppose you look back to November of 2018. In that case, you'll notice a strong correlation between a dropping 30-year fixed mortgage rate and a rising number of mortgage applications for home purchases, leading one to believe that this could occur again over the foreseeable future. This would ultimately result in the demand for housing to increase exceedingly. The only difference is that this time, we will drop from a far higher rate, with a peak of 7.79, compared to a 4.94 rate in November 2018.
Source - Mortgage News Daily
If the supply for single-family homes isn't sufficient to match its potentially all-time high demand, we could see the median sales price of households sold continue to increase to numbers that put millions of Americans' hope of purchasing a home out of reach. Unfortunately, there hasn't necessarily been an influx of new single-family housing units under construction in the past few years. There was a 46% decrease in construction between April 2022 and February 2023, with a lingering reduction of 19% in August 2024 compared to the peak number in 2022, according to the Federal Reserve Bank of ST. Louis. The significant increase in mortgage rates likely caused this, but it still creates a reason for concern moving forward. Luckily, the expected decrease in mortgage rates will bring current homeowners into the market due to the increased demand for their homes, offsetting some of the demand. Even with the incentive for existing homeowners to finally place the for sale sign on the front of their lawn, the question remains: will this increase in supply be able to keep up with demand, or will housing prices continue to surge?
