Borrowers and prospective homebuyers could be close to seeing some relief in monthly mortgage payments.
After two years of elevated borrowing costs, the Federal Reserve is expected to say it's cutting interest rates at its meeting Wednesday. It’s the next step in the central bank’s campaign to restore the country’s economy since the onset of the COVID-19 pandemic.
That anticipation of a move to cut rates picked up with August’s inflation data showing that prices grew only 2.5% compared to a year earlier. That lower price increase marked the lowest inflation reading since February 2021, brought the measure closer to the Fed’s target rate of 2% and came as concerns grow that the labor market could be softening because the economy is easing.
Though the mortgage market is only indirectly affected by the Fed’s actions, the average cost of borrowing money to buy a house has surged over the past two years alongside the higher interest rates that commercial banks charge each other to lend cash. Similarly, in anticipation of the Fed’s September meeting, mortgage rates have eased in recent weeks, reaching their lowest averages in more than a year.
While it can vary, the latest data from financial services company Experian puts the average mortgage balance at about $245,000, up from the previous year. But in 2024, borrowers have already seen their monthly mortgage payments easing: In July, the national median mortgage payment was $2,140, data from the Mortgage Bankers Association showed.
With each quarter point decrease in the 30-year, fixed-rate mortgage average, borrowers could see that monthly payment fall as much as $60, according to a report from mortgage data firm Intercontinental Exchange.
Mortgage rates are currently hovering below 6.5%, but if rates fall to 6% in coming months as some economists anticipate, the monthly payment for an average mortgage could drop by $120, the report said. And if averages slide down to 5.5%, those monthly payments could decrease by as much as $225.
In their latest forecast, economists at mortgage giant Fannie Mae predicted that mortgage rate averages will settle around 6.4% by the end of this year and at 5.9% by the end of next year.
It’s a long-awaited shift for the embattled housing market. In recent years, a combination of headwinds — including housing supply shortages, high mortgage rates and soaring home prices — have sidelined prospective homebuyers and created affordability challenges for some homeowners. But economists and industry professionals say that lower mortgage rates could bring buyers back to the market, removing or at least easing one of the barriers to homeownership.
The Mortgage Bankers Association, for one, "is expecting that slower home-price appreciation, coupled with lower rates, will ease affordability constraints and lead to increased activity in the housing market," Edward Seiler, the group's associate vice president for housing economics, said in a statement.
To be clear, the effect of mortgage rates on buyer behavior can't easily be isolated to identify with any accuracy its effect on sales, lending professionals say, and a Fed interest rate cut isn't enough to fix the housing market. But it is enough to stir optimism, according to Fred Bolstad, executive vice president of national retail lending at U.S. Bank.
"As we look at 2025, we are forecasting a lower rate environment," Bolstad said in an interview. "The consensus is that '25 is going to be a better year than '23 and '24."
Buyer demand
There are already signs that a low-rate environment is expected to be coming as mortgages have become cheaper in recent weeks. But there's another hold-up: Recent declines in mortgage rates haven't been enough to lure prospective homebuyers who were sidelined by the expensive cost of borrowing back into the housing market.
Instead, mortgage application data has shown that some buyers are still hesitating. Some economists have explained this phenomenon, saying that a portion of buyers are waiting to make their move to see just how far rates will fall. At the same time, other industry professionals have warned against that mentality.
Bill Banfield, chief business officer at financial services company Rocket Cos., for example, said the September rate cut is “already priced into the market.”
He told CoStar News that "if you're waiting for the news to happen, it doesn't mean that mortgage rates are going to fall if the Fed moves rates in September, because the smart Wall Street people have already priced it in. It's not like it just fell and it will fall again.”
Matthew Graham, chief operating officer of financing data provider Mortgage News Daily and a former loan officer, made a similar argument in a Sept. 4 blog post.
“By the time the Fed actually cuts, most of the mortgage rate movement associated with that cut will have already happened,” he wrote.
That said, it’s important to pay attention to what the Fed says and not just what decision it makes at September’s meeting, according to Melissa Cohn, regional vice president at William Raveis Mortgage.
“Are they going to say we are now on a path of reducing rates over the near future,” Cohn said in an interview. “Or are they going to say we are still going to be data driven, and our decision for future rate cuts will be based on future economic data.”
In other words, if borrowers are expecting a drastic drop in mortgage rates Wednesday, they’re in for an unpleasant surprise. Instead, it’s more likely that there will be a long-term, gradual easing of mortgage rates, especially if the Fed signals it is set on a path of interest rate cutting.
"The psychological impact of the Fed finally making a move will help buyers get off the sidelines and start their buying journey,” Denise McManus, global real estate adviser at Engel & Völkers, said in a survey from personal finance website Bankrate.
One puzzle piece
What's more, industry professionals said, is that lower mortgage rates are just one part of a much bigger shift that needs to take place in the housing market.
“Homebuying and selling activity, at one point it was quite sensitive to changes in mortgage rates,” Wells Fargo economist Charlie Dougherty told CoStar News. “But I've seen mortgage rates drop a fair amount without a noticeable or material pickup in home sales or mortgage demand."
“That tells me there's other things happening that are constraining overall housing market activity,” he said.
For one, even if mortgage rates ease to below 6% and monthly payments for homebuyers become less expensive, the market is still grappling with a historically low supply of houses, Bolstad said. Though affordability may improve, homebuyers seeking a median-priced house might still have trouble finding a residence.
At the same time, home prices are still growing at a fast pace, reaching all-time highs. And though some industry pros have predicted that growth will slow down, a serious shift in the mortgage market would have the potential to derail that, according to Cohn.
"Buyers need to remember that when rates are down, the affordability factor increases, and more buyers will come into the marketplace," she said. "Prices will go up, so if you're waiting for lower rates, that means you're waiting for higher prices."
Ultimately, it's important to keep in mind that even if the Fed cuts rates this month, the housing market is not instantly going to rebound. And for buyers, it's a good time to do their research.
"It's really important for folks now to arm themselves with as much information as they can, " Bolstad said. "Whether it's talking to their financial adviser about their financial goals and [how] owning a home fit[s] into that, or what would a refinance mean for them on the mortgage side."
He added that "people get very concerned about missing the window. The best way not to miss a window is to be ready, and they can do that right now, just by calling a loan officer or their financial adviser."