As you’ve likely heard, the Federal Reserve made a 50 basis point rate cut on September 18th. But you’ve also probably heard several opinions on what this actually means. Between news headlines and social media, there is a lot of confusion floating around about the impact of the recent rate cut. So, let’s break it down and discuss what to expect moving forward.
Let’s start by addressing one of the main reasons for confusion - the word ‘rates’ itself. In the real estate world, ‘rates’ is almost always associated with mortgages. We’ve used this terminology in past newsletters, and you hear it all the time across lenders, agents and consumers alike. However, the Federal Reserve has no direct control over mortgage rates. When we hear that the Fed cuts rates, we’re talking about the Federal Funds Rate.
The Federal Funds Rate has a direct impact on short-term rates like credit cards, car loans, personal loans, etc. However, it has an indirect impact on mortgage rates; the direction of mortgage rates is largely tied to the overall perception of the economic environment. This can also add to the confusion, because there are obviously numerous factors that play into the economy. And this is a major reason why the future of mortgage rates is almost impossible to predict accurately.
So, what can we predict for the future of mortgage rates? Is this recent Fed cut a good thing for the real estate environment?
Again, the Federal Funds Rate has an indirect impact on mortgage rates. However, this recent cut does provide some insight into where mortgage rates may be heading in the near future by looking at some of the other economic factors involved.
One of the Fed's main goals is to keep inflation under control, which is a large reason why they’ve been hiking rates in recent years. So, this rate cut signals that they feel inflation is trending in the right direction. They also predict inflation will continue to decrease, anticipating more rate cuts heading into 2025. Lower inflation is good for mortgage rates.
At the same time, the Fed believes unemployment will continue to tick upward, which would also be good for mortgage rates. Higher unemployment signals a weaker economy, and would prompt more action from the Fed to stimulate economic activity.
Furthermore, if we start to see some real signs of a recession, which is possible and something the Fed wants to avoid, that would also cause mortgage rates to fall to foster more economic activity in the housing sector.
Overall, we’re currently in a fairly good spot when it comes to mortgage rates. The average on a 30-year fixed-rate mortgage is just over 6% - over a full percentage point less than we saw in September 2023. And the recent Fed predictions suggest that we will see mortgage rates continue to decline heading into 2025.
As always, you shouldn’t try to time the market waiting for rates to come down - especially in Colorado where we see consistent price appreciation in most areas. The best time to make a move is when it makes sense for you and your current situation.
