Fed Set to Cut Rates, But Mortgage Relief May Fall Short: What Homebuyers Need to Know

Many potential homebuyers are hoping that the Federal Reserve’s upcoming rate cut will provide some relief from high mortgage rates. However, housing market experts caution that the expected rate cut may not lead to significant drops in mortgage rates, leaving some buyers disappointed.

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In recent months, the average 30-year mortgage rate has fallen slightly, now hovering around 6.2%. While this is lower than rates earlier in the year, experts say that the benefits of the Fed’s rate cut may have already been absorbed by the market. Mortgage rates are not directly tied to the Fed’s benchmark interest rate but tend to fluctuate with long-term economic expectations, making it unlikely that they will fall sharply following the anticipated rate cut.

Why the Fed's Rate Cut May Not Impact Mortgage Rates Significantly

Danielle Hale, a chief economist at a major real estate platform, suggests that much of the decline in mortgage rates has already occurred ahead of the Fed's announcement. According to Hale, it’s more about what the Fed signals regarding the future rather than the immediate rate cut itself.

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The Fed's intention to cut rates aims to stimulate economic growth, but mixed economic data could complicate the path forward. Inflation has started to moderate, but there are still lingering concerns in some areas of the economy, particularly housing. Additionally, job growth has slowed, but wage growth remains strong, which could continue to pressure inflation.

Given these economic uncertainties, the Fed faces the challenge of balancing the need for rate cuts while avoiding over-stimulation of the economy. Some analysts predict that mortgage rates could actually rise slightly if the Fed’s actions don't meet market expectations.

Mixed Reactions from the Market

Market traders are betting on the Fed to make multiple rate cuts before the year ends. Predictions indicate the Fed could lower the benchmark rate by 100 basis points before year-end, with cuts likely in November and December. However, some experts caution that the Fed could disappoint market expectations by moving more slowly than anticipated. This slower pace could lead to a slight rise in mortgage rates in the coming months, which could catch many buyers off guard.

Past Trends in Rate Cuts and Mortgage Rates

The last time the Fed entered a rate-cutting cycle, mortgage rates didn’t see a significant drop either. In late 2018, average mortgage rates were nearly 5%, but by the time the Fed began cutting rates in mid-2019, they had already fallen to 3.75%. Despite subsequent rate cuts, mortgage rates remained within a narrow range for the rest of the year, suggesting that immediate rate cuts may not always result in substantial mortgage rate drops.

Understanding Consumer Expectations

There’s often confusion among consumers about the connection between the Fed's short-term interest rate and long-term mortgage rates. Many buyers expect these rates to move in tandem, but the reality is more complex. Mortgage rates are influenced by long-term bond yields, inflation expectations, and other economic factors that aren't always directly tied to the Fed’s actions.

Kelly Shue, a professor of finance, points out that people often make the mistake of grouping short-term and long-term rates together in their minds, leading to misinformed expectations about mortgage rates. For those considering home purchases or refinancing, it’s important not to wait for a perfect rate that may never materialize.

Advice for Homebuyers

For many buyers, waiting for mortgage rates to drop further may not be the best strategy. Experts advise that if you find a home you like and can afford, locking in a rate now may be a smarter move than hoping for significantly lower rates after the Fed’s rate cut. The housing market is gradually stabilizing, with more homes available and slightly more affordable mortgage payments compared to when rates were higher earlier this year.

Future Outlook for Homebuyers

With housing inventory steadily rising, prospective buyers may find it easier to navigate the market over the coming months, even if mortgage rates don’t drop as much as hoped. Experts believe that 2025 could see the housing market return to more typical levels of activity, offering some hope for buyers willing to wait.

For now, however, the Fed's actions are unlikely to bring the kind of immediate relief many are hoping for when it comes to mortgage rates. Buyers should remain cautious, stay informed, and be prepared to act based on the broader economic landscape rather than pinning hopes on short-term changes in Fed policy.

Also Read: Lower Mortgage Rates Boost US Homebuying Demand | Latest Housing Market Trends 2024