Navigating the Housing Market After the Federal Reserve’s Rate Cut  

The housing market has always been shaped by key economic factors, and its past offers valuable insights into what may lie ahead. With the Federal Reserve’s recent 0.50% rate cut, we could see shifts in affordability, buyer demand, and overall market trends. While predicting housing prices and mortgage rates remains challenging, it’s wise to take a step back and examine history for perspective. 

Lessons on market timing from the 1980s 

Reflecting on the past, the advice during the 1980s was to buy a house immediately. The inflation of the 1970s and subsequent housing boom convinced many that delaying a purchase would leave them permanently behind. However, time proved that this fear was largely unfounded. Homes were available at reasonable prices in the years that followed, underscoring that fear of missing out (FOMO) isn’t always a valid reason to rush into the market. 

The advice seemed reasonable at the time because it was based on experience. In the years following World War II, several factors contributed to the growth of homeownership: 

• Government assistance. Programs such as the Federal Housing Administration and the U.S. Department of Veterans Affairs helped increase access to home loans. 

• Favorable tax policies. Homeowners benefitted from the ability to deduct mortgage interest and property taxes. 

• Suburban expansion. Post-war economic growth and suburban development fueled demand for homes. 

• Cultural value of homeownership. Mortgage debt was seen as a financial priority, reinforcing the idea of homes as a forced savings mechanism. 

• Lack of short-term pricing information. Unlike today, homeowners were less exposed to real-time home price fluctuations, reducing the temptation to act on short-term market trends. 

Recent developments: Interest rate cut and housing supply 

The Federal Reserve’s September 2024 rate cut is a response to inflation and an effort to spur economic activity. However, this may not translate directly into significantly lower mortgage rates. While the prospect of rate cuts helped send mortgage rates to around 6.2%, the lowest since February 2023, there is no guarantee that they will continue that downward path. It’s important to note that economic conditions and other factors continue to influence mortgage rates beyond the Fed’s decisions. 

Ironically, lower mortgage rates could drive home prices even higher. More buyers may reenter the market, intensifying competition for the limited supply of available homes. While the rate cut may also incentivize homebuilders to start new projects, it will take time before any meaningful increase in supply materializes. 

With the Federal Reserve rate cut, should I sell my home now? 

While selling is always a personal decision, here are three compelling reasons that might make now the right time to list your property: 

1. Seller’s market. With falling interest rates, the market tends to become more favorable for sellers, as lower rates stimulate buyer demand. More buyers mean increased competition, often leading to faster sales and stronger negotiating power for sellers, potentially securing better terms and quicker closings. 
2. Lower real estate commissions. Recent changes in real estate commissions – prompted by a 2023 National Association of Realtors decision – could reduce the cost of selling your home. Lower commission fees and competition among agents and listings might lead to quicker sales and higher offers. 
3. Favorable market conditions. Increased buyer activity and strong negotiating leverage make this a potentially advantageous time to sell. By acting now, you could benefit from higher selling prices, while avoiding any future market downturns that could negatively impact your home’s value. 

Despite these benefits, there are also reasons to consider delaying your sale. While interest rate cuts boost buyer demand, inflation remains high in other areas. Closing costs, taxes, and the challenge of finding an affordable new home might outweigh the benefits of selling now, creating a financial burden for sellers. Additionally, if your home requires major repairs, such as replacing windows or fixing the roof, it may be wise to wait until those updates are complete. Although costly, these repairs could ultimately improve your home’s value and marketability. 

Is it a good time to buy? 

It may be worth waiting if you have flexibility. Although there is no guarantee that rates will continue to decrease, indications are that the Fed may make more cuts in 2024 and 2025. Ultimately, the decision to buy now or wait depends on your financial situation and housing needs. 

Should I refinance my mortgage? 

Refinancing your mortgage can help lower monthly payments or provide access to home equity, especially with falling interest rates following the Federal Reserve’s rate cut. Homeowners with high-interest mortgages should consider refinancing if the new rate is at least 1% lower than their current one. However, refinancing comes with closing costs, typically 2-5% of the loan amount, so it’s essential to calculate your break-even point – the time when savings from a lower mortgage outweigh upfront costs. If you’re planning to stay in your home beyond this point, refinancing may be worth it. 

Options like no-closing-cost refinancing or rolling the costs into your loan can be beneficial for those who expect to move soon or prefer to avoid upfront fees. Before deciding, carefully assess your financial situation, credit score, and how long you plan to stay in the home. 

Buying or selling a home is a significant financial and personal decision. While lower interest rates and market trends can present attractive opportunities, it’s essential to carefully evaluate your needs and financial situation. The housing market will keep evolving, and waiting could bring better options. For more information, contact your wealth advisor. If you are not a Mercer Advisors client and want to learn more, let’s talk.