What the Fed’s rate cut means for buyers
The Federal Reserve recently cut interest rates for the first time since the Great Recession took hold in 2008, though the move is not likely to deliver significant juice to an already favorable borrowing environment for home buyers. The federal funds rate, which is what banks charge one another for short-term borrowing, will now hover between 2% and 2.25%, according to news reports.
The Fed says its decision to lower interest rates, which comes after months of pressure from President Donald Trump, is designed to stave off the threat of an economic downturn. But it's unlikely to translate into additional mortgage savings for many buyers. With the interest rate for a 30-year loan already hovering below 4%, the Fed’s move may be more meaningful for buyers with other types of financing, said Lawrence Yun, chief economist for the National Association of Realtors.
“Many borrowers will benefit, especially those with adjustable-rate mortgages and commercial real estate loans,” Yun said. “The longer-term 30-year fixed-rate mortgages will see little change in the near future because they had already declined in anticipation of this latest move by the Fed.
“These low interest rates will partly help with housing affordability over the short-term," he added. "Both rents and home prices have been consistently outpacing income growth. The only way to mitigate housing-cost challenges as a long-term solution is to bring more supply of both multifamily and single-family homes to the market."
Still, lower borrowing costs are helping buyers manage rising home prices. For example, buyers who spend $1,500 on monthly mortgage payments can afford to purchase a $402,500 home this year compared to $367,500 last year, when mortgage rates averaged 4.57%, according to realtor.com.
“Last year, buyers would have needed an additional $145 a month on top of the $1,500 to afford a $402,500 home,” said Danielle Hale, realtor.com’s chief economist.
In some locales, buyers’ money can stretch even further.
“An extra $35,000 in purchasing power, depending on where you are in the country, can really make a difference to buyers today,” Hale said. “It still counts, even with home prices up 6% nationally. That increase in purchase power is greater than the national price increase."
This article was contributed to The Log by National Association of Realtors.