What you should know about buying a house before a possible interest rate cut

CNN
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The Federal Reserve is widely expected to cut interest rates on Wednesday after holding them at a 23-year high for more than a year, fueling hopes that the sluggish American housing market could soon turn around.

Mortgage rates have doubled since 2020, contributing to one of the most unaffordable housing markets in history. Although the Fed does not directly set mortgage rates, its actions affect borrowing costs across the economy.

The most obvious effect: A rate cut could ease upward pressure on mortgage rates and make part of the home-buying equation more affordable. That could be good news for first-time buyers and existing homeowners who have been hesitant to put their homes up for sale in a higher-rate environment. But it could also lead to tougher competition among homebuyers.

In fact, mortgage rates have already begun to decline steadily in anticipation of the Fed's rate cut expected on Wednesday. According to Freddie Mac, the average 30-year fixed-rate mortgage rate fell to 6.20% last week – the lowest since February 2023 and well below last year's peak of 7.79%.

A single percentage point change in mortgage rates may not seem like much, but it can save homebuyers hundreds of dollars in monthly payments.

As an example, consider a home that sold for $422,600, the average sales price of a home in the U.S. according to the National Association of Realtors. Assuming the buyer makes a 20% down payment at closing and has a standard 30-year fixed mortgage rate, that buyer could save more than $2,600 per year in interest payments by securing a 6% mortgage rate instead of 7%.

Supply was another major factor contributing to housing market difficulties: Homeowners who had locked in ultra-low pandemic-era mortgage rates were less willing to sell their homes. This has led to tougher competition and often resulted in bidding wars for existing homes on the market.

Falling interest rates could finally break this “lock-in” effect on mortgages.

“There are homeowners who would have liked to sell but haven't because they couldn't afford their next mortgage given the high interest rates,” said Daryl Fairweather, chief economist at Redfin. “The more interest rates go down, the more viable it is for these people to sell their homes and buy again.”

Still, it is highly unlikely that mortgage rates will return to levels seen early in the pandemic, when the Fed cut rates in an emergency measure to stimulate the economy, Fairweather said.

Most investors expect the Fed to cut its benchmark interest rate by just a quarter of a percentage point on Wednesday. While further rate cuts are expected, there is no guarantee when they will occur.

“Many people have secured mortgage rates of around 3%. We're not going that low,” she said.

In fact, Wells Fargo estimates that the average interest rate on 30-year mortgages will be 6.5% by the end of 2024 and 5.9% by the end of 2025.

If you bought a home in 2022 or 2023, the prospect of refinancing your mortgage might seem attractive given falling interest rates. Some financial advisers advise waiting until you can get a mortgage rate that's a full percentage point lower than the rate you're already paying, Fairweather said.

“If you're getting a 7.5% mortgage, you may already have enough money to refinance,” she said. “If I were in the shoes of someone who got a really high interest rate, I'd probably wait and see where rates go.”

However, for you as a potential homebuyer who can't wait to get out of the closet, a further decline in mortgage rates could prove to be a double-edged sword.

While lower interest rates could increase homebuyers' purchasing power, they could also lead to more intense competition for homes in the market and drive record-high home prices even higher.

“This is one of those things where you have to be careful what you wish for,” said Greg McBride, chief financial analyst at Bankrate. “A further decline in mortgage rates could trigger a surge in demand that makes it harder to actually buy a home.”

Another factor that could ultimately increase demand is the National Association of Realtors' recent rule changes.

The changes, which took effect on August 17, aim to transform the way NAR's 1.5 million real estate professionals are paid for helping people buy and sell homes.

“This rule change has made it a little difficult to navigate the real estate market right now,” Fairweather said. “I think a lot of buyers are waiting until next year to get in.”

Overall, timing the real estate market is difficult, but speaking to multiple mortgage lenders and comparing their rates can help you secure a better rate.

While falling mortgage rates make the prospect of buying a home more attractive for some, they shouldn't be the only deciding factor, says Leo Pareja, CEO of eXp Realty, one of the largest real estate brokerage firms in the U.S.

“I always tell people: Secure what you can afford,” Pareja said. “Your home is where you raise your family. It's your lifestyle, proximity to amenities, proximity to school, all these different factors. It's not just about the return on investment.”