Interest rate cuts have been anticipated for some time, and it looks like they are finally on the horizon for September. This prediction comes from Fannie Mae, a government-sponsored enterprise that backs mortgages. Furthermore, Federal Reserve Chairman Jerome Powell indicated at Wednesday’s FOMC meeting that a rate cut could be expected as soon as the next meeting.
“If we see inflation moving down quickly or in line with expectations, economic growth remaining strong, and the labor market stable, then a rate cut could be on the table at the September meeting,” Powell told reporters.
A reduction in the federal funds rate could breathe new life into a stagnant housing market. Here’s a closer look at potential changes.
The Return of an Investor-Friendly Housing Market
The recent Fed meeting didn’t result in an August rate cut but increased speculation for September. This first cut, expected to be 0.25 percentage points, could mark the beginning of a housing market resurgence, reducing the benchmark rate from 5.25% to 5%. If similar cuts occur in December and the economy remains strong—based on inflation and employment data—2025 could see additional cuts, with increased buying and selling activity.
“A modest cut of 25 basis points in September seems likely. If successful, we could see two more 25 basis point cuts before 2024 ends,” said Jacob Channel, chief economist at LendingTree, in an email to CBS News. “However, these cuts are not guaranteed. The Fed can pivot quickly if unexpected events occur.”
Although the Fed doesn’t directly control the interest rates charged by banks, it does influence them. The Fed sets the federal funds rate, which determines how much banks charge each other for overnight loans. Consequently, banks adjust their rates for credit cards, mortgages, personal loans, and other financial products.
Lower Rates Will Motivate Sellers
Despite better-than-expected home price growth in Q2, Fannie Mae economists predict moderate growth in 2024 and 2025, with annualized rates of 6.1% and 3%, respectively. Increased supply, especially in the Sunbelt, will help ease prices.
However, inventory remains tight in the Northeast and Midwest. Lower rates would encourage sellers to list their properties, creating market momentum. It would also make it more affordable for developers to build more houses.
“We expect varied market conditions to lead to a slight decline in new home sales nationally in 2024, but a slight increase in existing home sales,” said Doug Duncan, Fannie Mae senior vice president and chief economist, in its ESR report.
The Fannie Mae ESR Group sees no need to revise its expected 2024 sales figures of 4.81 million. Higher numbers are anticipated in 2025 as rates fall. Rates are expected to drop to 6.4% in 2025 from 6.8% in the latter part of 2024.
Expect a Refinancing Boom
The 2024 rate cuts are expected to boost loan originations by $14 billion from June’s forecast, with closings likely in 2025. Homeowners and investors have held off on refinancing in 2024, anticipating lower rates in 2025.
Fannie forecasts refi volumes to grow to $563 billion. Increased home values mean many owners are sitting on significant equity, which they might use for cash-out refinances.
The Importance of the Jobs Market
While rampant inflation was the main reason for the interest rate hikes a year ago, which slowed the housing market, lowering rates depends on balancing inflation reduction with stable job growth. A significant hiring slowdown would harm economic stability.
The Fed has emphasized the importance of lowering inflation but has now shifted its language, acknowledging “risks to both sides of its dual mandate.” The dual mandate refers to the Fed’s goals of maintaining stable prices and low unemployment.
This means the Fed will now weigh job market performance more heavily when making rate decisions, rather than focusing solely on inflation.
What a Rate Cut Means for Homebuyers
Lower borrowing costs will benefit all areas of real estate. For investors, this means lower mortgage payments and increased cash flow.
“A 0.44 percentage point decline might not seem significant, but in mortgage terms, it can save buyers of a $350,000 home about $100 a month in payments,” noted LendingTree’s Jacob Channel in a CBS News article.
Strategies for Investors Anticipating a Rate Drop
With expected rate cuts later this year and into next, how can investors prepare?
Improve your credit
Good credit is crucial to taking advantage of lower rates. Check your credit report for free on the federal credit reporting website without impacting your score.
If your credit needs improvement, start working on it now. Taking small steps can increase your score and buying power.
Lock in fix-and-flips now
Fix-and-flip projects can take six months or more. Buying a fixer-upper now means listing the house when rates have dropped significantly. Remember, “date the rate and marry the house.”
Finding a home might be more challenging than fixing it up due to a tight market, but buying well can yield rewards once rates drop.
Buy rentals
Purchasing rentals now will help you beat the rush. You can always refinance later when rates decrease.
Consider waiting to refinance
If you’ve owned a property for years, you may have significant equity and might consider a cash-out refinance. Waiting could save you money with rates expected to tumble in 2025. However, balance this against potential investment opportunities you might miss.
Start renovations on your primary residence with plans to refinance later
If you own your home and have equity, start renovations now in preparation for refinancing with lower rates.
Simple touch-ups can make a difference, including:
Painting walls
Decluttering
Changing flooring
Staining wood
Adding new cabinet hardware
Painting kitchen cabinets
Adding new backsplashes
Updating bath fixtures
Adding moldings
These upgrades can enhance your home’s value and your living experience.
Final Thoughts
When interest rates were last low, bidding wars and low inventory made buying difficult. Waiting for rates to hit rock bottom isn’t advisable. If you’re considering your next investment project, start now and refinance later. With one rate cut anticipated in September and potential for more, buying in 2024 will allow you to benefit in 2025 without worrying about this year’s tax bill.
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