How The Fed’s Big Rate Cut Will Affect Real Estate

Q: How will the Fed’s half point rate cut affect real estate? Alan, Scotch Plains, NJ

A: The Federal Reserve announced earlier this month that it will cut its benchmark interest rate by half a percentage point which marks the first rate reduction in many years. The Fed’s previous rate hikes slowed the housing market contributing to a reduction in home sales. Nevertheless, home prices hit record levels due to lack of housing supply. Because home values are not driven solely by interest rates but by a complicated mix of factors, it’s hard to predict exactly how the Fed’s efforts will affect the housing market. Mortgage rates already had fallen sharply over the past year going from over 8 percent in October 2023 down to 6.2 percent as of the Fed’s meeting on September 18. The central bank’s policy shift could spur more activity in the housing market by increasing homebuyer demand and increasing the inventory of homes available for sale by incentivizing more home sellers into their local real estate market, although there is no direct one-to-one correlation between the Fed’s rate cut and a reduction in mortgage interest rates. Lower mortgage interest rates increase the buying power of people looking to buy a home because every 1% decrease in mortgage interest rates increases home buyer purchasing power by almost 10%. For example, a prospective home buyer who qualified to buy a $500,000 home at a mortgage interest rate of 8% would qualify to buy a home worth almost $550,000 at a mortgage interest rate of 7%. Thanks for your question, Alan.

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