The Federal Open Market Committee announced it would be cutting the federal funds rate by half a percentage point, or 50 basis points, putting the benchmark rate at 4.75% to 5%. It’s the first time the rate has been dropped since March 2020. Back then, members of the Fed were concerned that the coronavirus pandemic would lead to widespread job losses and a massive contraction of consumer spending. The effective rate hit 0.05% in April 2020. But after a historically brief recession, the American economy bounced back. In March 2022, the rate began a sharp ascent, reaching 5.33% this month.
In a news conference Wednesday, Federal Reserve Chairman Jerome Powell cited a stable labor market and easing inflation as proof that the Fed was meeting its dual mandate. “The U.S. economy is in good shape,” Powell said. “It’s growing at a solid pace, inflation is coming down, the labor market is in a strong place, we want to keep it there.”
Most people connect the federal funds rate to mortgage rates. It is true that the federal funds rate strongly influences mortgage rates, but the Fed does not directly decide how expensive mortgages will be.
In fact, most real estate experts say Wednesday’s cut has likely been built into mortgage rates in recent weeks. So don’t expect to see a huge drop in the cost of a mortgage starting this week. But the rate has a butterfly effect on just about every part of the economy. Think: Lower interest rates on big-ticket purchases like cars, lower costs to build new housing, making tech sector investments more appealing, and even making more ambitious transportation infrastructure possible. Here’s what California home buyers and sellers should watch for:
How the Fed rate cut could impact real estate
The average 30-year fixed mortgage rate reached its most recent high of 7.79% in October 2023. Since then, it’s slid down to 6.2% as of this week. Nadia Evangelou, senior economist and director of real estate research for the National Association of Realtors said more Fed rate cuts are anticipated this year, and 30-year mortgage rates could come down to 5.9% by the end of 2024.
Decreasing rates mean homebuyers have more buying power. Evangelou said right now, the average monthly mortgage payment for the median-priced home in the Bay Area ($1.45 million) is around $7,100. If rates drop to 6% — historically known as the “magic Number” for mortgage rates at which housing market activity is triggered — that monthly payment could drop to just below $7,000; if they hit 5.8%, it would be $6,800. With rates currently at 6.2%, she said, 12.2% of Bay Area households can afford that median priced home. Dropping to 6% would mean 12.7% — an additional 8,350 households — could afford to enter the market.
But there is a downside, she said.
“Areas where housing inventory is already low, this boost in demand can lead to more buyers,” she said. Increased demand “puts upward pressure on home prices as buyers compete for a limited number of homes. This price increase can offset some of the affordability gains from lower mortgage rates.”
Powell addressed the housing market question at the Federal Reserve news conference Wednesday afternoon. He said constrained housing supply has more impact on the market than mortgage rates.
“Where are we going to get the supply? And that’s not something the Fed can really fix,” Powell said. “The supply question will have to be dealt with by the market and also by the government.”
For people who bought in the last couple of years, rate drops raise questions about whether it’s time to refinance. Fed watchers anticipate two more rate cuts this year — but that’s only if the economy remains stable or improves. The market is notoriously sensitive in election years. If the labor market wobbles or something spooks investors, this could be the last rate cut of the year.
“There’s no guarantee,” Parrish said.