With the Federal Reserve’s recent reduction in the federal funds rate, mortgage rates are expected to follow sooner rather than later. Although the two are not directly related, mortgage rates tend to follow the federal funds rate – eventually. With more discounts almost certainly in the near future, it’s time to think about what’s next, especially if you’re trying to buy a home in this intense real estate market.

There are some likely impacts of lower mortgage rates, and some that won’t, so let’s go over them all.

1. More people will likely return to the market, at least initially

According to economists of all stripes and recent surveys, a significant number of potential home buyers are sitting on the sidelines and waiting for interest rates to fall so they can increase their purchasing power. One survey indicates that as many as two-thirds of potential buyers may be waiting, and another indicates that 40 percent of potential home buyers who are sidelined haven’t even met with a lender yet to get pre-approved.

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Up to a third of potential buyers say they believe a 6.0% interest rate will entice them to purchase a home. Another 36% would do so at a rate of 5.5%. We’re not that far from the first, and the second will probably appear by the middle of next year. That’s a lot of new buyers.

2. Real estate prices are likely to rise further

I know that apparently everyone says that there is such more listings on the market right now, but that’s not a complete truth without context. Yes, total registrations increased by almost 14% year-over-year in September. But that’s still about three months of inventory, or half of what you need to have a balanced real estate market. And historically, the 1.78 million listings reported by Redfin are well below the highs of more than 2.275 million in September 2019, which were still anemic.

Freddie Mac estimates we still have a shortage of 1.5 million units in the first quarter of 2024, despite homebuilders’ efforts to make up for decades of deficits now that demand for new construction is higher.

The fundamental economic forces of supply and demand determine the real estate market, meaning prices will not fall if rates fall. In fact, as rates fall, housing prices will likely rise again because there will be more demand from more buyers and relatively fewer purchases as the number increases. buyers in the market.

This doesn’t even take into account all the homes that were destroyed in the most recent hurricanes and which will generate increased demand as insurance payouts are distributed.

3. Existing homeowners are unlikely to sell their homes

The only hope many people are clinging to is that homeowners with low interest rates will finally be tempted to venture out into the market as rates fall. But these people probably don’t really understand what it will take for these owners to do this. Barring personal crises, homeowners would be no better off selling their homes, and few would willingly take a massive hit to their wallet for a slightly larger lot or to be five minutes closer to work.

In the second quarter of 2024, 18.4% of homeowners had mortgage rates around 4%, 34.6% had mortgage rates around 3% and 21.6% had rates below 3%. That’s a whopping 75% of homeowners with a mortgage and a large number of homes that have been in escrow for some time to come. It would take a lot to get them back on the market.

In many cases, it will still be cheaper for them to tap into their equity with a home equity line of credit (HELOC) or second mortgage to build on their existing home than it will be to buy another home – and much easier taking into account the state of the market.

Stay hopeful, but anchor yourself in reality until 2025

We’re all hoping that lower mortgage rates on the horizon will allow the housing market to return to a healthy balance, but the truth is we’re not there yet. We’re not even close.

Even after the Fed’s latest rate cut, the average 30-year fixed mortgage rate rose to 6.44% (as of October 17, 2024). The market had already priced in the Fed’s rate cut, and when that happened, the needle didn’t move.

It won’t always be this way, and you should certainly keep checking mortgage rates, but we’re a long way from the cooling markets of the past. The impact of lower rates on home buying – at least for now – will be minimal at best. Next summer may be a different story, but that will depend on how much the Fed cuts rates between now and then.