Federal Reserve Rate Reduction: What It Means for the Real Estate Market
The Federal Reserve began reducing rates by half a percentage point on Wednesday, September 18, marking the first such move since March 2020. Naturally, there were detractors on both sides of the argument, with some calling for a larger percentage cut and others saying they would rather have the assurance of more progressive rate reductions. All American consumers, whose budgets had been stretched by two years of unheard-of inflation, undoubtedly welcomed the news of the long-term rate cut.
What does this ruling actually imply for homeowners? What does it mean for people who have put off buying a property due to the combined challenges of rising property values and historically high loan rates? The majority of economists concur that while it won't have a significant impact right now, it is a much-needed step in the right direction. Indeed, by the end of the fourth quarter, the majority of those experts anticipate one or more further rate cuts. Even though the rates aren't high enough to significantly reduce high-interest debt like credit card debt, it would probably go a long way toward boosting market optimism.
We must not only avoid getting ahead of ourselves but also acknowledge the speed at which progress is being made. Perhaps this is the ideal moment to start establishing the groundwork for your real estate aspirations. It is important to emphasize that there has never been a period in history when everything was ideal. Furthermore, it's likely that no one born after World War II experienced anything like the kind of disruptive, society-altering Covid-19 incident. As the fifth year of the epidemic draws near, it has been repeatedly stated that this is all unfamiliar territory. Like other public and commercial institutions, the Federal Reserve was forced to take actions that were unlikely to have been necessary in the absence of a once in a-century occurrence. The lengthy correction really begins now.
How can you get ready to sell your house? In the immortal words of Sir Winston Churchill, "Remain composed and continue." You're off to a good start if you've already hired a realtor to help you sell your house. A top-notch realtor will design an effective marketing strategy to guarantee your home receives the most attention possible and will help you every step of the listing and sale process. The competition for your house will probably grow as rates slowly decline.
How can one get ready to become a home buyer?
Utilize rate hikes to reduce debt with high interest rates. However, as previously mentioned, rate increases that result in immediately apparent interest savings are still some time off. Establishing a relationship with a certified sales representative can also help you receive the kind of direction, encouragement, and counsel you might require—especially if this is your first time buying or you haven't purchased a property in a long time. Additionally, a realtor will put you in front of more homes, improving your chances of discovering the one that perfectly suits your needs.
We'll try our best to explain the ramifications for the real estate market and offer commentary on any more rate reductions when they occur. As of right now, it's still unclear how substantial the cuts will be in the future or when they might occur. But if the Federal Reserve's action from earlier this week is any guide, it appears that we may soon be returning to a housing market that is more steady and identifiable.
Housing Market Sees Increased Inventory, Reduced Buyer Competition, and Lower Mortgage Rates
Despite the ongoing affordability challenges in the housing market for most buyers in the United States, "this is as good as it gets," said Orphe Divounguy, a senior economist at Zillow. This optimism comes from the market generally seeing more inventory, low buyer competition, and lower mortgage rates. This means now, with the slight improvement in the market conditions, might be the best time for those looking to enter the market.
According to a new report published by Redfin, an online real estate brokerage firm, buyers will now need to earn at least $115,000 just for them to be able to afford a typical house in the U.S. While that number may seem high, it represents a 1% decline from a year ago, a decline that is the first since 2020.
Redfin also found that the median mortgage payment has now dropped to $2,534 for the four weeks ending September 15, which is a decline of 2.7% from a year ago. This housing payment drop is the biggest decline that we've had in four years.
According to Daryl Fairweather, chief economist at Redfin, both declines stem from lower mortgage rates.
The Freddie Mac data, via the Federal Reserve, shows that the interest rates peaked this year at 7.22% on May 2. But, as of September 19, the average 30-year fixed rate mortgage is now down to 6.09%, a number even lower from the 6.20% just the previous week.
"The only reason mortgage payments are down is because of the rate effect," said Fairweather.
What are the challenges that will remain?
According to Redfin's data, the typical American household earns about 27% less than what they need to afford a home, with an average income of about $84,000 a year. Because at the end of the day, yes, there is a market drop, but home prices still remain high. The median asking price for newly listed homes for sale is $398,475, up 5.4% from a year ago.
Here's What Buyers Can Expect Expect in the Coming Months
Mortgage rates will depend on the economic conditions.
Lower home loan rates will provide "a great opportunity for buyers who have been waiting," Divounguy said. However, and this is the kicker, he also said that while the reduction in the mortgage rates presents a more favorable change to prospective buyers because of the Federal Reserve cutting interest rates, that does not "necessarily guarantee mortgage rates will continue to fall." This really just shows more clarity on how complex the mortgage rate movement is, and hopefully, this will encourage buyers to consider much broader economic indicators and not just the Federal policy. At the end of the day, while the mortgage rates are influenced by the Fed's policy, they are also tied to Treasury yields and other economic data.
“It’s almost impossible to figure out what mortgage rates are going to do from week to week or month to month,” said Jeff Ostrowski, a housing expert at Bankrate.com.
As Melissa Cohn, regional vice president of William Raveis Mortgage in New York, stated, "Mortgage rates will go by the way of the economy if the economy shows signs of weakening ... rates will come down if we see the opposite, and that the economy is chugging along and employment gets stronger, it's quite possible that rates will go up." Emphasizing the direct correlation between economic health and interest rates. If the economy weakens, the rates are likely to drop as part of the efforts to stimulate economic activity, and on the other hand, if the economy remains strong and employment increases, the rates may rise to reflect a more robust economic environment where inflation control becomes the top priority.
There are More Homes Coming on the Market
Increased Housing Inventory
According to Orphe Divounguy, the combination of having a lower mortgage rate and a higher inventory of homes for sale has created a more favorable housing market for buyers. Just looking at the date from the end of August 2024, there were 1,350,000 homes for sale, which is an increase of 0.7% from a month prior, according to the National Association of Realtors. That inventory level is a significant 22.7% increase compared to August 2023.
More homes on the market means reduced competition among buyers, which basically gives them more options and potentially allows them to negotiate more on the prices.
Homebuilder Confidence Improvement
Homebuilder confidence in the market for newly-built single-family homes has been improving since September 2024, according to the National Association of Home Builders, or NAHB. Its survey also shows that the share of builders cutting prices in September was 32%, which is down one point, albeit a slight discount; this is the first decline since April 2024, according to NAHB.
"That tells me that some builders are probably starting to see some increase in foot traffic and that the market could get competitive again," said Divounguy.
Price growth will depend on the level of existing home inventory, said Robert Dietz, chief economist at NAHB.
Future Price Trends and Market Competitiveness
Robert Dietz, NAHB's chief economist, adds that "existing home inventory is expected to rise as the mortgage rate lock-in effect diminishes, placing some downward pressure on prices as well."
This really just means that since there is a low-interest mortgage, the homeowners are currently holding off on selling. But, as the lock-in effect weakens, there will most likely be more homes that are likely to come onto the market, which could increase supply and, in turn, place downward pressure on the prices.
What all this means...
"You're trading one difficulty for another difficulty," Fairweather warned.
The housing market is not going to get worse in the next 12 months, said Fairweather.
If home buyers are discouraged because they haven't found a home, they might have a better chance next year when there are more listings, Fairweather said.
The only downside to that is this may introduce new risks like heightened competition, she warned.
Summary:
Most homeowners are sitting on loans with record-low mortgage rates, creating a so-called "lock-in effect" or "golden handcuff" effect where they don't want to sell and finance a new home at a higher rate. But if mortgage rates further decline in the next year, the number of homes for sale might grow as more and more homeowners may be motivated to sell.
The only problem with that is that most home buyers think that is the "trajectory" of the housing market. This means buyers should be prepared for increased competition as well, making it harder to secure a property despite better market conditions.
So, what would you do? Act now while conditions are slightly improved, or wait for more listings with the potential risk of facing greater competition?
The Rise of Cryptocurrency (Bitcoin) in Real Estate
Digital currencies are becoming an increasingly common payment method as millennials rush the housing market.
On March 15, 2024, the Bitcoin coin peaked at $73,844 following a taxing crypto winter. That new record was primarily brought about by the SEC's approval of spot Bitcoin ETFs in January 2024. Following that, in late February and early March, the Bitcoin price surpassed the $60,000 mark, which was thrilling enough for investors, but it went on to go over $73,000!
Benefits of Bitcoin
One of the main benefits is that it provides a much faster and more efficient way to make payments. Traditional methods of payment can often take days, weeks, or, in worse cases, even months to process. And with cryptocurrency, the processing of payments is almost instantaneous, which is a huge advantage if you are trying to close a deal as quickly as possible.
Another benefit of using cryptocurrency is that it is a very secure way to make payments. When dealing with large sums of money, you always want to make sure that the transaction is as secure as possible. According to Coinbase, cryptocurrencies are decentralized digital currencies designed for use over the Internet, free from the control of any governments, banks, or corporations. Thus, anyone who wants to take part in it can do so.
Another advantage of using cryptocurrency is that it can help you avoid fees. Compared to traditional payment methods, which often come with several fees, such as transaction fees, transfer fees, and even conversion fees. With crypto, you can avoid all those fees, saving you a lot of money in the long run.
Using crypto as collateral
Some cryptocurrency holders will purchase a house without selling assets to cover everything or making a sufficient down payment enough to qualify for a mortgage. Instead, they use their digital currencies to borrow the capital necessary to finance a home purchase and defer in paying their capital gains taxes.
From the perspective of wealth generation, this approach is enticing. Cryptocurrency holders can choose to diversify their holdings and prevent their portfolio values from fluctuating significantly during stock market downturns, which they can easily do just by purchasing an uncorrelated real estate asset. At the same time, they keep ownership of their cryptocurrency holdings, which could increase in value over time, as long as they repay what they owe accordingly.
Homebuyers can choose between two paths when taking this route — decentralized finance (DeFi) or crypto-backed mortgages:
Crypto-backed mortgages function similarly to traditional home loans, except that the borrower pledges cryptocurrency holdings to secure the loan. The lender then releases funds in U.S. dollars or another fiat currency equivalent to the value of the collateral. The two parties can then decide the monthly installments' currency.
DeFi lending, on the other hand, occurs through apps where any cryptocurrency holder can act as a lender or a borrower without the need for middlemen. Depositors can park their assets and earn high interest by contributing money to the lending pool. If they qualify, borrowers can acquire funds from the pool to purchase a house and receive them quickly through smart contracts.
Are you ready to close crypto real estate deals?
While cryptocurrency transactions in real estate still remain as a small fraction of the total transactions in the U.S., their increasing frequency suggests a growing acceptance. That trend could continue if crypto gains in popularity. This is a reflection of a broader trend where cryptocurrencies are slowly being integrated into mainstream financial systems, particularly as more and more younger and tech-savvy generations enter the housing market.
With the growing acceptance of digital currencies in real estate, are you ready to close your next crypto real estate deal?