With the Federal Reserve’s half-percentage point rate cut on Sept. 18, you could practically hear equity-rich folks staging their living rooms for a home sale. Or you could even see buyers queuing up for open houses, contracts in hand like they were waiting for Taylor Swift tickets.
Indeed, the 30-year fixed rate mortgage average fell the next day to 6.09% per the St. Louis Fed. This may loosen up a historically tight housing market; its inventory choked while would-be sellers with sub-3% mortgages sat things out.
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“It’s fantastic for home buyers because it’s cheaper to borrow money,” said Josh Flagg, the star of Bravo’s “Million Dollar Listing Los Angeles,” in a CNN interview.
It’s easy to imagine everyone in the market with their pent-up emotions, asking so many questions. Can 5% mortgages be far behind? And what happens if the Fed cuts rates again before the year ends? Or yet again? Home buyers should snag those welcome mats at Target before they run out.
Not so fast. Flagg pointed to one caveat emptor: “If sellers start to think, ‘Oh great, mortgage rates are cheaper, I’m going just to raise the price on my house.’ That’s not going to work.”
Lower mortgages could open the door to higher prices. Maybe much higher. And where’s the welcome mat for that?
Talk of a second interest rate cut?
The Fed’s move has sparked some remarkable activity. For the week ending Sept. 20, the Mortgage Bankers Association’s refinancing index soared 20.3%, its highest level since April 2022, while mortgage applications jumped 11.0% from one week earlier. Given how 30-year rates peaked at 7.76% in November, the refinancing stat should come as no surprise.
And already, there’s talk of a second interest rate cut. The CME Group’s FedWatch website — which counts down to the Nov. 7 Fed meeting by the second — reports a broad market sentiment that there is a better than 50-50 chance of a second half-point cut.
Granted, Flagg isn’t Fed Chairman Jerome Powell. But you can turn to former Fed chair, Alan Greenspan. He coined the term “irrational exuberance” in 1996 to describe the infamous dot-com bubble. And if that label fits a quarter century later, then maybe sellers rushing back into the game could wear it.
Flagg admitted so much when he evaluated an alternative sales thought process. “They’re going to think, ‘Prices have been fair this whole time, people just couldn’t afford it, but now they can … [Sellers] just need to come down a little bit and not be as selfish.”
Read more: Rich, young Americans are ditching the stormy stock market — here are the alternative assets they’re banking on instead
How to navigate the twists and turns
As no one wants to guess how Fed policy will affect the housing market, here are three strategies to navigate the current state of play.
Keep it local. Even as interest rates stayed high, home demand in Rockford, Illinois (hot) versus Lake Charles, Louisiana (the nation’s coldest, according to Realtor.com) operated on a separate plane. Factors such as home affordability, property taxes, area schools and the local cost of living have proven far more consequential and have nothing to do with rates.
Keep it specific. A real estate transaction teams buyer and seller, and both sides are often represented by agents. It’s a mistake to assume this is 100% impersonal. Agents in specific markets know each other and the circumstances of every sale differ. Some prospective buyers write a heartfelt letter to the seller, which can tip the scales in their favor.
Keep calm. It’s common to see a mortgage rate drop temporarily shake up the market. But during that short stretch, have faith that things will cool down. Prepare for the long haul — finding the right home can be challenging no matter the time — and consider enlisting an agent who knows the lay of the land, acting as a steadying presence should you start to despair.
In the meantime, assume nothing and listen to the experts, Greenspan included, who at 98 has seen all manner of market crazy.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
