The Federal Reserve Will Likely Lower Rates Later This Year. Here's Why You Should Buy a House Now
KEY POINTS
- The Feds are talking about lowering rates at some point this year, but when and by how much remains to be seen.
- Since the federal funds rate doesn't directly affect the 30-year fixed mortgage rate, there's no guarantee how much a drop would impact your mortgage costs anyway.
- Waiting to buy just increases your risk of even stiffer competition and higher prices for homes.
You may be hearing rumblings that there are lower interest rates coming. If you've been waiting to purchase your first home, you may be sitting out of the market just to see what comes of it. After all, why miss out on a good discount, right?
If you've been waiting for actions by Jerome Powell to get started on your hunt for a house, you really have to stop waiting. There's no good reason to wait, and a lot of good reasons to get out there and start touring homes.
1. The federal funds rate is not the same as mortgage interest rates
Although the federal funds rate, the rate that the Federal Reserve sets, can influence the cost of your mortgage, it doesn't set the cost of your mortgage. Case in point, the federal funds rate reached its current point at 5.33% in August 2023. That's where it's been ever since. But, the interest rate for a 30-year fixed-rate mortgage has been anywhere from its height of 7.62% in October 2023 to its low during the same period of 6.64% in January 2024.
If you're waiting for the Fed to drop rates, you're waiting on the wrong thing. What you want to see is the 30-year fixed-rate mortgage rate dropping.
2. When mortgage rates start to drop, buyer activity will increase
Real estate agents across the country are reporting that while it's still hard to buy a home right now, it's nothing like it was a few years ago when rates were lower. Today, inventory has slightly improved and buyers have thinned out somewhat, giving a new buyer trying to get on the homeownership ladder a fighting chance. This is partially due to the psychological barrier created by the combination of a 6% to 7% mortgage interest rate and the promise that a rate cut is coming later this year.
Even though a rate cut has no direct effect on mortgage interest rates, they'll certainly drop a little bit, the buyer floodgates will fly open, and the limited inventory problem that plagued the market in 2021 and 2022 will be back. Everybody will be trying to buy a house if they've been waiting.
It was very obvious when mortgage rates started to dance with 5.5% in summer 2022 that the buyers who didn't have to buy right away decided to wait. The Mortgage Bankers Association of America's Purchase Index, which is a measure of how many mortgage applications are received by lenders, dropped precipitously at that time and hasn't recovered, even though mortgage interest rates have not changed significantly. The inverse will likely happen when those rates do finally fall.
3. More buyers, constrained supply mean prices will go up again
The problem with any reduction in the 30-year fixed-rate mortgage average in the near term is that it can't drop enough. A whopping 93.13% of mortgage holders have a rate at or below 5.5%. And 83.63% of those have a rate under 4.5%. With the 30-year fixed-rate mortgage average at 6.64%, there would have to be a violent crash for the housing market to find 4.5% again any time soon, which means that mortgage holders will continue to stay in their homes for as long as they can.
I know you hear that a lot in the news, but here's the why of it. Let's say that I have a house that was priced at $200,000 when I bought it with a 4% mortgage. That makes my principal and interest payment $859.35. But like so many people with these mortgage rates, my area has seen an across the board value increase of 40%, so my home and those just like it are now worth $280,000. Even if I bring $80,000 to closing as a down payment -- that's all my appreciation -- my house payment for the same house at 6.64% is now $1,282.61.
I am now paying $5,079.12 per year extra to live in a house very similar to the one I just sold. (Let's stop for a chart break)
| Year Purchased | Home Value | Mortgage | Interest Rate | Payment | Yearly P+I |
|---|---|---|---|---|---|
| 2019 | $200,000 | $190,000 | 4.0% | $859.35 | $10,312.20 |
| 2024 | $280,000 | $200,000 | 6.64% | $1,282.61 | $15,391.32 |
What if I instead bought down to maintain my payment?
As you can see in the table below, doing so, if it's even possible in my market, is a huge step down, not a small one. That house is worth 30% less than the one I chose to buy initially -- it's 30% less neighborhood, or square footage, or finishes. That's a big change to my lifestyle, so there's no way I'm letting go of the home I have now for the same payment.
| Year Purchased | Purchase Home Value | 2019 Home Value | 2024 Home Value | Mortgage | Interest Rate | Payment |
|---|---|---|---|---|---|---|
| 2019 | $200,000 | $200,000 | $280,000 | $190,000 | 4.0% | $859.35 |
| 2024 | $215,000 | $153,571 | $215,000 | $135,000 | 6.64% | $865.76 |
My advice: buy now, before everyone else does
It'll be a rush to the finish line if you wait to buy on the hope rates drop because supply will remain locked up for some time to come, and frankly, prices are only going to go up more when rates do drop. Buy now, beat the rush, and make your life easier.
Our Research Expert
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