Housing News

The Fed Cut Interest Rates. Will Mortgage Rates Go Down Too?

High mortgage rates have stymied cost-conscious homebuyers for the last two years. Many are hoping those mortgage rates will soon notch large drops—but they may be disappointed.

The U.S. Federal Reserve announced on Wednesday that it was cutting interest rates by half a percentage point as its battle against high inflation winds down. This was the first rate decrease since 2020 and one of several expected cuts this year.

While mortgage rates are separate from the Fed’s short-term interest rates, when the Fed lowers rates, mortgage rates tend to follow. However, homebuyers shouldn’t anticipate a half point drop in mortgage rates, at least in the short-term.

“Many prospective homebuyers and sellers are watching the Fed, expecting a big drop in mortgage rates,” Lisa Sturtevant, chief economist of Bright MLS, said in a statement. The multiple listing service covers the mid-Atlantic region. “However, much of today’s rate cut has largely been baked in, with rates on the 30-year fixed rate mortgage falling since early July. It would be surprising to see a substantial drop in mortgage rates this week.”

Mortgage rates have already come down in anticipation of the Fed’s long-awaited rate cut. They averaged 6.2% in the week ending Sept. 12, according to Freddie Mac. That was down from an average 7.79% in late October 2023. (These rates were for 30-year, fixed-rate mortgages.)

“The rate cut is a good thing for the overall housing market,” said New American Funding Chief Investment Officer Jason Obradovich. “If the Fed indicates that they’re going to need to be even more aggressive with rate cuts then we could end the year in the 5s.”

However, lower mortgage rates aren’t guaranteed for the rest of the year.

“We could still be in the mid-to-upper 6s if [the Fed is] not aggressive, said Obradovich.

This is because the financial markets have anticipated the Fed will be cutting rates by a full percentage point this year, which is why, as Obradovich and Sturtevant noted, mortgage rates have fallen in recent months. 

If there are fewer cuts, mortgage rates could go back up again. However, if the Fed indicates even more are on the way, then mortgage rates may drop further.

The Fed raised rates to combat inflation, which was rampant after the pandemic but has since cooled. Now the Fed is facing pressure to cut rates to steady the economy and avoid a recession, as job losses have been rising in recent months.

Just how much mortgage rates fall “will depend on how the economy evolves,” said Fed Chair Jerome Powell at a press conference on Wednesday.

Lower rates would also benefit the housing market. Many homebuyers have been priced out due to high mortgage rates and elevated home prices. Others have been waiting for rates to fall before beginning or restarting their searches.

Even a small drop in mortgage rates can result in big savings.

For example, if mortgage rates fell from 6.2% to 5.5%, buyers purchasing a typical home might be able to save about $162 a month. That translates into about $1,944 a year and $58,320 over the life of a 30-year loan.

(This assumes the buyer put down 10% on the median home list price of $403,267 as of Aug. 31, according to Zillow data. The calculation does not include property taxes, insurance, homeowner association, or other fees.)

Lower mortgage rates could also incentivize more homeowners to list their properties. Many have been reluctant to move and give up the super-low rates they locked in during the pandemic when mortgage rates bottomed out under 3%.

Those extra homes on the market could provide buyers with more choices and help to keep prices in check. It’s when there are few homes for sale that buyers battle it out with bidding wars that keep prices high and rising.

“Rates need to be in the 5s to help first-time buyers purchase a home,” said Obradovich.