The Federal Reserve is delivering on its highly anticipated interest rate drop.
The central bank on Wednesday voted to lower rates by a half point in its first cut since the pandemic. The move puts the federal funds rate between 4.75 percent and 5 percent.
The Fed has been under renewed pressure to lower interest rates after the latest round of economic data showed inflation had fallen close to its 2 percent target, while unemployment had risen sharply to 4.3 percent.
Mortgage rates began falling in anticipation of the Fed cutting interest rates this month, with the rate for the most common type of home loan dipping to its lowest level in two years, according to the Mortgage Bankers Association. The average rate for a 30-year-fixed mortgage fell to 6.15 percent last week, while purchase and refinance applications rose 5 percent and 24 percent, respectively, from the previous week, seasonally adjusted.
Mortgage rates aren’t directly tied to the Fed’s interest rate, but are influenced by the same economic conditions that the central bank considers when determining whether to lower or raise the federal funds rate.
The National Housing Conference lauded the move in a statement, saying the cut is “set to have far-reaching implications for the U.S. housing market, potentially alleviating affordability concerns and stimulating inventory growth.”
But Fed Chair Jerome Powell cautioned Wednesday it was hard to “game out” the move’s effect on the housing market. The inventory crunch that has bogged down residential sales activity is “not something the Fed can fix,” Powell said, but is subject to market conditions and policy enacted by the federal government.
The Fed has held rates steady since last July, after hiking interest rates for more than a year in an attempt to reverse rising inflation. Mortgage rates rose alongside the Fed’s upticks, stalling home sales nationwide and sending inventory levels plummeting. Sellers who may have otherwise listed their properties have held onto them and the low mortgage rates they secured during the pandemic.
But with mortgage rates on the decline, transactions have started rising again, with new home sales last month up nearly 15 percent from July, according to an MBA report.
“The housing market could see a recovery sooner rather than later,” Redfin economist Chen Zhao told The Real Deal last month. “If you’re a buyer or a seller waiting for the Fed to act, a lot of that is priced in already.”
In the short-term, lower mortgage rates will likely increase competition for the few homes that are on the market, with some experts predicting that it will take months for inventory levels to recuperate from the effects of higher mortgage rates.
“In this higher rate environment, we never got to totally catch up on inventory,” Melissa Cohn, a regional vice president with William Raveis Mortgage, told TRD in August. “Levels today are definitely higher, but there’s still not what many people would consider [them] to be normalized.”
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