As most of you probably saw in the news recently, The Federal Reserve just lowered its interest rate by a half percentage point. What exactly does that mean? How will this impact real estate? And who is the Federal Reserve exactly? Let’s dive in and talk about it!
First, for those who may not know, the Federal Reserve is America’s central bank, and essentially, the “Fed” traditionally adjusts the interest rate percentage range in response to what’s happening in the economy. They will historically raise interest rates when the economy has too much inflation, and will lower (or cut) interest rates, when the economy looks weak, and unemployment is on the rise. With inflation easing a bit, the Fed lowered its key interest rate by a half percentage point, making this the first major rate cut in four years! The drop in the “rate range” went from 5.25-5.5% to 4.75-5%. According to an article in USA Today, the rate percentage drop is “expected to ripple through the economy, providing the first dose of relief in years to Americans who have struggled with high borrowing costs for mortgages, credit cards and auto loans”. According to Federal Reserve Chair Jerome Powell, “the U.S. economy is in a good place, and our decision is designed to keep it there”.
On a side note, there seems to have been some confusion in the real estate industry through social media messaging relating to the interest rate cuts. The Fed interest rate cut is not a mortgage rate cut, though it will positively impact those rates as well. When local banks go to the Regional Federal Reserve banks, such as the one in Dallas, to loan money, it’s now cheaper for them and incentivizes them to loan more money to the end consumer and stimulate the economy through spending, etc. According to Freddie Mac, the current mortgage interest rate for a 30-year conventional loan is 6.09%. That is dramatically less than where we were in the summer. May of 2024 saw a mortgage interest rate of 7.22%. The last time we saw interest rates around 6% (or lower) was February of 2023. It’s a positive sign that the Federal Reserve rates are being lowered, therefore bolstering the economy along with a lowering mortgage interest rate as well. According to the New York Times, “mortgage rates have already been coming down in anticipation of the central bank’s cuts, making buying a home a bit easier for the typical household”.
In addition to this cut, there is anticipation that the Fed will lower rates by an additional quarter of a point two more times this year, and potentially even more next year. If mortgage rates continue to drop below 6%, we could see a flurry of activity in the market this fall, which could create more competition and be a good thing for both sellers looking to list their houses on the market and home buyers with more buying power and possibly more home options from which to choose. As stated in The Dallas Morning News, “30-year fixed mortgages may need to fall below the 6% psychological threshold before it spurs greater activity among sellers and buyers”.
Overall, these are really good signs for the U.S. economy, and even better signs for the real estate market headed into the fall season. If you have any questions about the rate cuts or want a deeper dive into how this affects the real estate landscape in your neighborhood and city, let’s chat!