A drop in interest rates sounds good right? Well, the Federal Reserve just announced its first major interest rate cut in years. Normally, this would mean cheaper credit cards, car loans and most importantly lower mortgage rates.
Unfortunately, things are different. In simple terms, an interest rate cut is meant to reduce financial pressure on the economy. However, this time, experts are concerned that this won’t make homes more affordable for buyers.
Why the Fed Cut Rates
Firstly, it’s important to remember that the Federal Reserve always makes adjustments to interest rates to ensure that the economy is stable.
Theoretically, lowering interest rates should result in cheaper borrowing costs for all types of loans, including mortgages. Due to rising mortgage rates and skyrocketing property prices, housing affordability reached historic lows, and homeowners had been waiting for some respite for years.
Why Mortgage Rates Aren’t Dropping
It is important to note that mortgage rates are more closely tied to the bond market in comparison to the Federal Reserve Bank interest rates. Even though the Fed’s decision does influence the market, it is not the only fact.
Right now, even though the Fed has lowered rates, mortgage lenders aren’t rushing to cut their rates. That’s because:
- Home prices remain historically high – Even if mortgage rates a dropped by a very minor percentage, it still won’t suffice for the high prices of homes.
- Supply is still limited – Unfortunately, there are not enough homes available for sale on the market.
- Investors remain cautious – Lenders want to protect themselves against uncertainty in the economy, so they aren’t decreasing mortgage rates.
What This Means for Homebuyers
The reality is disheartening for many who thought that this rate drop would finally make house ownership simpler. Mortgage rates still remain persistently high.
- Those who are first time home buyers might find that homes are out of their budget. Even if the monthly payments are low, the total cost of the home is more than affordability.
- All those who currently own homes and have locked in low rates during 2020-2021 are unlikely to sell as new loans would be far more expensive.
- There are currently little indications of significant short-term relief in the housing market as a whole.
Could Things Change Soon?
Even though experts note that this interest rate cut might not lead to an immediate decrease in mortgage rates, it could allow for gradual improvement. How will this work? If inflation continues to cool and the Federal Reserve’s implements more interest rate cuts, then mortgage rates could potentially drop.
It’s still very unlikely that mortgage rates will drop extremely low like how it did during the pandemic. Mortgage rates are predicted to settle between the range of 5% to 6% range.
What Buyers Can Do Right Now
If you’re looking to buy a home, here are a few strategies to stay ahead in this challenging market:
- Make sure you shop around for loan options; don’t settle on the first option you get.
- Try and improve your credit score so that you will qualify for better rates.
- Be flexible with the type of home you want to buy or area you want to live in.
- If you don’t need to purchase a home now, don’t rush to buy. Monitor the market before making a decision.
The Bottom Line
Even though the interest cut might seem like good news, for those looking to purchase homes, this doesn’t make such a difference. Mortgage rates are impacted by many other factors apart from the Federal Reserve. Housing supply and prices need to improve.
For those looking to purchase a home, it may take some time to get the deal that suits your budget.