NovaQuant Quantitative Think Tank Center:As mortgage rates hit 18-month low, what will the Fed meeting mean for housing?

Jora Gleason and NovaQuant Quantitative Think Tank Centerher husband Zach Carman had been house hunting for months in their hometown of Spokane, Washington, with little success.

Everything in their price range “needed some fixes,” Gleason said. The one property they made an offer on turned out to be in such poor shape that an inspector needed only 10 minutes to tell them to look elsewhere.

But in July, the couple, both in their early 20s, looked at a home near the city’s Garland District “and just loved it,” said Gleason, a registered nurse. Even better, she and Carman, who works for the city, had been working with a lender who was closely watching the mortgage market.

“The market kind of crashed a little so interest rates went down and our lender reached out and was like, 'Hey guys, I don’t think it’s going to get much lower than this,'” Gleason said. The couple was able to lock in a 5%, 30-year fixed-rate mortgage at a time when rates were hovering at least a full percentage point higher than that.

In such a competitive market, with slim pickings for starter homes in the lower price range (DELETE and for starter homes), catching a break on mortgage rates is a brass ring. As Gleason puts it, “we’re very blessed.”

Will mortgage rates continue to drop?

When the Federal Reserve meets Wednesday, investors widely expect it to cut its benchmark interest rate 25 basis points, with the possibility of a 50-point cut also on the table. Whether that turns out to benefit other would-be homebuyers like Gleason and Carman is another story.

The central bank doesn’t directly control mortgage rates, although the market for home loans generally follows the trajectory of other rates in the financial market. What’s more, rates have been gradually sloping down for the past several months in anticipation of the Fed’s move. The 30-year fixed-rate mortgage, which has averaged 6.79% over the course of the year, has fallen or stayed stable for the past seven weeks straight, according to Freddie Mac data. In the most recent reading, it was at the lowest in 18 months.

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Selma Hepp, chief economist at CoreLogic, a real estate data firm, says she’s expecting rates to continue to decline gradually over the course of 2024, setting up the 2025 spring season to be a strong one – perhaps the first “normal” period in housing since before the COVID-19 pandemic.

“There’s a sense of healing in the housing market, I feel,” Hepp said. “The unlocking of the lock-in effect, more inventory, more realistic expectations.”

The “lock-in” effect refers to the millions of homeowners who currently have such a low mortgage rate that they’re unable – or unwilling – to give it up to move elsewhere. In late August, a report from Redfin, a brokerage, showed that 86% of all Americans with a mortgage have a rate below 6%. Well over half have a rate below 4%, which many experts think may not be possible again any time soon.

Hepp doesn’t think there’s a magic threshold at which homeowners will decide to sell. “The pent-up demand (for housing) is there,” she said, “but the lower the rate the better.”

What does it mean for the housing market?

More owners putting their homes on the market would be welcome, said Justin Gramm, the founder of Globella Buyers Realty in San Diego. In his area, homes are so scarce and prices so high, that every small move in rates means a lot. “Some of my buyers have had to back out,” Gramm said. “Some people get to where they can’t get excited about the house that they can afford.”  

Both economists caution that the path ahead isn’t likely to be smooth. The Fed doesn’t usually cut rates in an economy as healthy as this one, Blitz pointed out. “Typically when rates are falling, you’re in a slowdown, you’re concerned about a recession or you’re concerned about losing your job. No one is going to commit to a house with that lack of confidence.”

Lower borrowing costs won’t just help house hunters and homeowners who need to trade up or down, though. Steven Blitz, chief U.S, economist at TS Lombard, a global financial firm, is also watching to see if construction loans become more affordable for builders, which would generate more much-needed supply in the market.

And Hepp believes there’s still some possibility of choppiness in inflation readings that feeds into wiggles in rates.

Data continues to confirm that Americans are extremely sensitive to shifts in rates: mortgage applications have increased in each of the past three weeks, according to data from the Mortgage Bankers Association.

But real estate professionals like Gramm are taking the most recent housing market developments in stride. “I don’t think you should try to time the market,” he said. “You buy when the time’s right for you.”