Rate cuts should fuel homebuying, will the wait soon be over?

Until the Fed decides to start cutting interest rates, potential homebuyers may stay on the sidelines. But will that cut be soon?

It’s the question being asked around the world as investors await the easing of US monetary policy, and although few economists expect a cut to be announced at this week’s FOMC meeting which begins today, there is high anticipation that Jerome Powell will give a strong signal for a September cut.

For those wanting to get on the housing ladder, a cut can’t come soon enough with 47% of respondents to a new Bankrate.com survey saying that they won’t be comfortable buying a home until mortgage rates are below 5% and 38% saying they need rates to be below 4%.

“Expectations about mortgage rates keep changing,” said Bankrate analyst Jeff Ostrowski. “The US economy is still going strong, and the Federal Reserve keeps putting off its first rate cut. Add those things together, and the consensus is that mortgage rates will remain in the range of 6.5% to 7% by the end of 2024.”

Even if the Fed does cut the target rate to below 5% by the end of 2024, mortgage rates are likely to take longer to fall from their current level, which Freddie Mac says was an average of 6.78% for a fixed-rate 30-year loan in its latest survey published last week.

“Mortgage rates essentially remained flat from last week but have decreased nearly half a percent from their peak earlier this year,” said Sam Khater, Freddie Mac’s Chief Economist. “Despite these lower rates, buyers continue to pause, as reflected in tumbling new and existing home sales data.”

Bankrate data puts the average 30-year mortgage at 6.90% and shows that rates have not been below 6% since August 2022 and not below 5% since April of that year. Its research reveals that higher interest rates are also keeping many home sellers on ice for now with three in ten respondents saying that they would not be comfortable selling until rates are below 5%, although 42% say there is no rate that would change that this year.

“The mortgage lock-in effect has frozen home sales for the past couple of years,” added Ostrowski. “Alas, these results don’t bode well for an unfreezing of the market. Many homeowners aren’t keen to sell at all, and many would-be buyers are waiting for mortgage rates to dip below 6%.”