How the Federal Reserves Next Move Could Impact the Housing Market

Now that its September, all eyes are on the Federal Reserve (the Fed). The overwhelming expectation is that theyll cut the Federal Funds Rate at their upcoming meeting, driven primarily by recent signs that inflation is cooling, and the job market is slowing down. Mark Zandi, Chief Economist at Moodys Analytics, said:

Theyre ready to cut, just as long as we dont get an inflation surprise between now and September, which we wont.

But what does this mean for the housing market, and more importantly, for you as a potential homebuyer or seller?

Why a Federal Funds Rate Cut Matters

The Federal Funds Rate is one of the key factors that influences mortgage rates things like the economy, geopolitical uncertainty, and more also have an impact.

When the Fed cuts the Federal Funds Rate, it signals whats happening in the broader economy, and mortgage rates tend to respond. While a single rate cut might not lead to a dramatic drop in mortgage rates, it could contribute to the gradual decline thats already happening.

As Mike Fratantoni, Chief Economist at the Mortgage Bankers Association (MBA), points out:

Once the Fed kicks off a rate-cutting cycle, we do expect that mortgage rates will move somewhat lower.

And any upcoming Federal Funds Rate cut likely wont be a one-time event. Lawrence Yun, Chief Economist at the National Association of Realtors (NAR), says:

Generally, the rate-cutting cycle is not one-and-done. Six to eight rounds of rate cuts all through 2025 look likely.

The Projected Impact on Mortgage Rates

Heres what experts in the industry project for mortgage rates through 2025. One contributing factor to this ongoing gradual decline is the anticipated cuts from the Fed. The graph below shows the latest forecasts from Fannie Mae, MBA, NAR, and Wells Fargo (see graph below):

So, with recent improvements in inflation and signs of a cooling job market, a Federal Funds Rate cut is likely to lead to a moderate decline in mortgage rates (shown in the dotted lines). Here are two big reasons why thats good news for both buyers and sellers:

1. It Helps Alleviate the Lock-In Effect

For current homeowners, lower mortgage rates could help ease the lock-in effect. Thats where people feel stuck within their current home because todays rates are higher than what they locked in when they bought their current house.

If the fear of losing your low-rate mortgage and facing higher costs has kept you out of the market, a slight reduction in rates could make selling a bit more attractive again. However, this isnt expected to bring a flood of sellers to the market, as many homeowners may still be cautious about giving up their existing mortgage rate.

2. It Should Boost Buyer Activity

For potential homebuyers, any drop in mortgage rates will provide a more inviting housing market. Lower mortgage rates can reduce the overall cost of homeownership, making it more feasible for you if youve been waiting to make a move.

What Should You Do?

While a Federal Funds Rate cut is not expected to lead to drastically lower mortgage rates, it will likely contribute to the gradual decrease thats already happening.

And while the anticipated rate cut represents a positive shift for the future of the housing market, its important to consider your options right now. Jacob Channel, Senior Economist at LendingTree, sums it up well:

Timing the market is basically impossible. If youre always waiting for perfect market conditions, youre going to be waiting forever. Buy now only if its a good idea for you.

Bottom Line

The expected Federal Funds Rate cut, driven by improving inflation and slower job growth, is likely to have a positive, albeit gradual, impact on mortgage rates. That could help unlock opportunities for you. When youre ready, connect with a local real estate agent so youre prepared to take action.