Fed cuts interest rate; impacts expected for mortgages and housing market

After months of speculation and anticipation, the Federal Reserve cut interest rates on Wednesday for the first time since 2020.

The Fed’s half-point rate cut—the biggest interest-rate cut in 16 years—brings the central bank’s effective benchmark rate to about 4.8%, down from a two-decade high of about 5.3%.

So what does this mean for homebuyers and homeowners? We asked Realtor.com® senior economist Ralph McLaughlin for his take on what to expect.

Mortgage rates will dip—a bit

For one, the Fed’s move will likely lead to lower interest rates on home loans. While the Fed doesn’t set mortgage rates, interest rates and mortgage rates tend to move in the same direction. However, McLaughlin doesn’t expect a huge drop in rates right now.

“We wouldn’t expect an immediate impact on mortgage rates, and that’s because the market has already priced the 50 bps cut into Treasuries and mortgage rates,” says McLaughlin. “A lot of the decrease in rates that we’ve seen over the past couple of months was the market anticipating that we’d get either a 25 or 50 bps cut today, like we did.”

While no one can fully predict where rates will go, McLaughlin’s best guess is that “rates could bottom out between 6% to 6.2% throughout the rest of the year and into the high [5%] by next spring.”

More homebuyers will start home shopping

While lower mortgage rates might tempt a few more homebuyers out into the market, McLaughlin doesn’t anticipate a huge and sudden rush on homes. He cites two reasons for this.

“No. 1, there may be anticipation that rates are going to come down further,” says McLaughlin. “So why am I going to buy at 6.2% now, when I could buy at maybe 5.7% or 5.8 % next year?”

The second reason homebuyer activity might not rise a ton right as rates drop has to do with the time of year.

“Fall typically isn’t the most popular time of year for buyers to go out looking for a home,” says McLaughlin. “People make decisions to buy for reasons that sometimes have nothing to do with mortgage rates. It has to do with getting kids enrolled in school, or having time to actually move, which might be in the summer months.”

The housing market will go haywire this spring

Although the housing market tends to fade into hibernation as temperatures drop this winter, McLaughlin says it will wake with a vengeance this spring.

“Come spring, when inventory starts to rise, I think that’s the time that we’re going to start seeing real noticeable uptick in interest,” he says. “With a mixture of increased inventory on the market and lower rates, that’s the recipe for a very active housing market.”

By spring, McLaughlin estimates that rates could be as low as 5.7% “if the Fed continues on the current trajectory.”

More homeowners will refinance to lower rates

Although homebuyer activity may not get truly rolling until spring, there will likely be a fairly immediate uptick in homeowners refinancing their home loans at lower rates.

“As mortgage rates continue to come down, albeit slowly, we should initially expect signals of increased activity to emerge from the refi market,” says McLaughlin.

Indeed, applications to refinance existing home loans are already up by 24% compared with the week before.

Home prices might go up

Since a homebuyer’s purchasing power increases as mortgage rates fall, homebuyers who get out there this spring will have bigger budgets to work with.

As a result, “we should expect home price growth to reaccelerate sometime in the spring,” says McLaughlin,“especially if historically laggy inventory is slow to respond.”