Federal Funds Rate Cut: How the Federal Reserve’s Next Move Could Impact the Housing Market

It’s September, and all eyes are on the Federal Reserve (the Fed) as we await their next move. The general expectation is that they’ll cut the Federal Funds Rate at their upcoming meeting. Why? Signs are pointing to cooling inflation and a slowing job market. Mark Zandi, Chief Economist at Moody’s Analytics, sums it up well:

"They’re ready to cut, just as long as we don’t get an inflation surprise between now and September, which we won’t."

But what does this mean for the housing market, and more importantly, what does it mean for you as a potential homebuyer or seller?

Why a Federal Funds Rate Cut Matters

The Federal Funds Rate plays a key role in influencing mortgage rates, along with other factors like the economy and global events.

When the Fed cuts this rate, it sends signals about the broader economy, and mortgage rates tend to follow. While a single cut may not lead to a huge drop in rates, it does contribute to the steady decline we’ve already been seeing. As Mike Fratantoni, Chief Economist at the Mortgage Bankers Association (MBA), explains:

"Once the Fed kicks off a rate-cutting cycle, we do expect that mortgage rates will move somewhat lower."

And chances are, the next cut won’t be a one-and-done deal. According to Lawrence Yun, Chief Economist at the National Association of Realtors (NAR):

"Generally, the rate-cutting cycle is not one-and-done. Six to eight rounds of rate cuts all through 2025 look likely."

The Role of the 10-Year Treasury Bond

While the Federal Funds Rate influences mortgage rates, the key indicator that directly affects them is the 10-year Treasury bond yield. Currently, the 10-year yield is at 3.784%, down from 3.867% last week, and lower than the long-term average of 4.125%. This is the key metric to watch. However, the Fed Funds Rate plays a significant role in the volatility of the 10-year yield.

We’ve already started to see the 10-year yield trend downward in response to expectations that the Fed will cut rates in September. While we may not see a dramatic drop in mortgage rates right away, cutting the Fed Funds Rate should help keep the 10-year yield trending downward, which in turn helps ease mortgage rates over time.

The Projected Impact on Mortgage Rates

Experts are forecasting a gradual decline in mortgage rates through 2025, with the anticipated cuts from the Fed being a contributing factor. The graph below shows the latest projections from Fannie Mae, MBA, NAR, and Wells Fargo (see graph below).

So, with inflation cooling off and job growth slowing, a Federal Funds Rate cut could lead to a moderate decrease in mortgage rates (as shown by the dotted lines). Here’s why that’s good news for both buyers and sellers:

1. It Helps Alleviate the Lock-In Effect

For homeowners, lower mortgage rates could help ease the “lock-in effect,” where people feel stuck in their current home because their current mortgage rate is lower than today’s rates.

If the fear of losing your low-rate mortgage has been keeping you from selling, a small drop in rates could make selling a little more attractive. That said, don’t expect a flood of new listings—many homeowners will still be cautious about giving up their existing low-rate mortgages.

1. It Should Boost Buyer Activity

For potential homebuyers, even a small drop in rates could make homeownership more affordable. Lower rates reduce the overall cost of a mortgage, making it easier for buyers who have been on the fence to finally make a move.

What Should You Do?

While a rate cut won’t drastically lower mortgage rates overnight, it will likely contribute to the gradual drop we’ve already started to see.

The anticipated rate cut is a positive sign for the housing market, but it’s still important to think about your personal situation. As Jacob Channel, Senior Economist at LendingTree, puts it:

"Timing the market is basically impossible. If you’re always waiting for perfect market conditions, you’re going to be waiting forever. Buy now only if it’s a good idea for you."

Bottom Line

With inflation improving and the job market slowing down, the Federal Funds Rate cut could lead to a gradual decrease in mortgage rates—opening up new opportunities for buyers and sellers. When you’re ready to explore your options, let’s connect. I’m here to make sure you’re prepared to take action when the time is right for you.

MISSY WIESEN

949.887.6644

Missy@ThePughGroup.com

DRE #01745112

www.MissySellsOC.com