Many prospective homebuyers are hoping the Fed will deliver further relief from high mortgage rates this week.
But even after Wednesday’s expected rate cut, they could be left disappointed.
Average 30-year mortgage rates have dropped more than a full percentage point since early May to 6.2% ahead of what’s expected to be the Fed’s first cut to its benchmark interest rate in more than four years. That steady decline means mortgage rates aren’t likely to fall much further immediately after the Fed’s move, housing market experts say.
“We’ve seen a lot of the benefits of the rate cut in the form of lower rates already,” said Danielle Hale, chief economist at Realtor.com. “It’s not about what the Fed does in September, it’s what they say about the future that’s going to provide ongoing rate declines.”
The Fed has signaled its intent to begin cutting rates to help jumpstart economic growth, but it’s been facing mixed economic data that calls into question just how quickly and deeply rates need to fall in the months ahead. Inflation broadly moderated in August but remained stubborn in certain subcategories including housing. And while the US added fewer jobs than expected last month, wage growth — which closely tracks inflation — was strong.
Traders see near-even odds of a 25 basis point rate cut or a larger 50 basis point drop at Wednesday’s meeting, according to CME FedWatch data. And they’re expecting several subsequent rate cuts when the Fed meets in November and December, leaving the benchmark interest rate about 100 basis points lower than the current 5.25% to 5.5% level by the end of the year.
Read more: How the Federal Reserve rate decision affects mortgage rates
Chen Zhao, who leads economics research at Redfin, said that mortgage rates could even rise slightly in the coming months — a counterintuitive outcome to many consumers — if the Fed ends up cutting more slowly than expected.
“There’s definitely ample risk for the Fed to really disappoint here and for mortgage rates to move up a little bit from where they are now,” Zhao said.
The Fed’s last pre-pandemic rate-cutting cycle followed a similar pattern. Average mortgage rates peaked at nearly 5% in late 2018 but had fallen to 3.75% by the time the Fed began dropping rates in July 2019. They remained between 3.5% and 3.8% for the rest of the year, despite two more 25 basis point cuts.
If the Fed’s move is already reflected in current mortgage rates, why are so many buyers expecting bigger drops to come? Kelly Shue, a professor of finance at the Yale School of Management, has researched this common misconception.
In a paper released last month, she and fellow researchers Richard Townsend and Chen Wang found that consumers and even professional forecasters tend to overestimate the degree to which short-term interest rates like the benchmark federal funds rate and longer-term interest rates on things like mortgages move together.
The reason for this is a phenomenon known as “categorical thinking,” where people lump different types of rates together in their heads, considering them to be part of the same general group.
Categorical thinking is part of human nature — it helps people simplify the world and recognize patterns. But sometimes, it can be an error.
“These categories are useful,” Shue said. “But where it could lead to mistakes in beliefs and decision-making is when people don’t think carefully about differences among items in the same category.”
That means that buyers shouldn’t wait to buy a house they like now in hopes of locking in a better deal on the interest rate, she added.
“For most of the loans that households deal with — long-term mortgage loans, refinances, etc. — there’s absolutely no reason to attempt to time when you get that loan,” she said.
Kristin Bailey, an Austin, Texas-based senior loan officer with the Leaman Team at mortgage lender LoanPeople, said “pretty much everyone” who calls her wants to chat about what they should do after the Fed’s rate cut. She’s had several recent refinancing-related inquiries where she advised customers to act sooner.
“Our previous purchase customers over the last couple years have reached out and said, ‘as soon as they cut it, we want to talk,’” Bailey said. “So I have that conversation of, ‘well, let’s talk now.’”
Read more: 6 times when it makes sense to refinance your mortgage
Even if mortgage rates don’t drop much more, weary buyers may have a slightly easier time navigating the housing market this fall and into next year. Available housing inventory has been rising steadily this year, hitting a post-pandemic high of more than 909,000 homes in August, according to Realtor.com data. Median monthly payments at existing mortgage rates are also roughly $300 lower than they were when rates topped 7% in May, boosting affordability.
“If you look at past cycles, we tend to see the housing market return to long-run averages. If that’s the case, then 2025 will be the year,” Hale said.
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