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How Recent Federal Reserve Rate Cuts Are Shaping the 2024 Housing Market: What Buyers and Sellers Need to Know

October 10,2024 | Posted By Jason Risley in Financial

A Changing Housing Market in October 2024

In October 2024, the housing market is seeing significant shifts. The Federal Reserve recently cut interest rates, and many are wondering what this means for mortgage rates, home affordability, and their ability to buy or sell a home. Understanding how these factors interact can help you make informed decisions in this evolving landscape. Let’s dive in to break down the recent developments and how they may affect you.

Federal Reserve Rate Cut Explained

The Federal Reserve recently announced a 0.5% rate cut, reducing the federal funds rate to between 4.75% and 5.0%. But what does this mean for the average person?

The federal funds rate is the interest rate that banks charge each other for overnight loans, and it’s set by the Federal Reserve. This rate directly influences short-term consumer rates like credit card interest, auto loans, and Home Equity Lines of Credit (HELOCs). As the federal funds rate drops, borrowing money in these categories becomes slightly cheaper.

However, mortgage rates don’t respond the same way as credit card rates. Let’s explore why.

Mortgage Rates vs. Federal Reserve Rates – Understanding the Difference

Many people mistakenly believe that if the Federal Reserve cuts rates, mortgage rates will automatically fall too. The reality is more complicated. Mortgage rates are influenced by long-term market expectations, investor behavior, and economic data.
When the Fed makes a rate cut, the market often has already anticipated this move. This is known as "baking it in." Investors, particularly those on Wall Street, analyze economic indicators and adjust accordingly. By the time the Fed announced the recent rate cut, mortgage rates were already reflecting that expectation, leading to only a slight drop from 6.11% to 6.26% instead of a significant decrease.

Where Mortgage Rates Stand in October 2024

In October 2024, mortgage rates are at 6.26%. This is lower than last year’s peak of 8%, but it’s still higher than many buyers would like. Earlier this year, rates were at 7.5%, which significantly impacted housing affordability.

How Interest Rates Impact Your Home Affordability

One of the most important things for buyers to understand is how interest rates affect what they can afford. Let’s use an example: If your budget allows for a $5,000 monthly mortgage payment (principal and interest only) with 20% down, the interest rate plays a major role in how much house you can buy.
Take a look at the statistics below:

At 5.0%, a $5,000 monthly payment can buy a home worth $1,163,750.
At 6.25%, that drops to $1,015,000.
At 8.0%, you’re looking at only $851,250.

The difference is substantial: a $312,500 difference in purchasing power when rates increase from 5% to 8%. This is why buying power fluctuates so much with interest rate changes and why lower rates mean a big boost in what you can afford.

What to Expect Moving Forward – Will Rates Drop Below 6%?

There is hope that mortgage rates could drop below 6% in 2025, especially if the spread between the 10-year Treasury yield and mortgage rates normalizes. Historically, this spread has been around 1.75%, but right now it’s unusually high. If conditions improve, we could see rates drop below 5%, significantly increasing affordability.

For buyers, this could mean the opportunity to afford larger homes or more favorable financing terms. For sellers, it could translate to more potential buyers in the market, driving demand higher.

Southern California Market Trends – Demand Is Rising

Interestingly, the Southern California housing market has seen a 3% increase in demand recently, despite it being a typically slower time of year. Orange County saw demand increase by 10%, while San Diego saw a 7% rise.

This rise in demand is occurring because interest rates, while still high compared to two years ago, have decreased from their peak levels, making home purchases more attractive. Additionally, as rates decline further, many potential buyers who had been sitting on the sidelines are now re-entering the market.

Inventory and Market Speed – Expected Market Time in 2024

Another critical concept is expected market time—the number of days it takes for a home to go from listing to escrow. In Southern California, expected market time dropped from 95 days to 94 days, indicating a slight acceleration in market activity.
Orange County has seen its expected market time drop from 78 days to 71 days. This is a positive indicator for sellers as the market picks up speed.

Areas like Riverside and San Bernardino are lagging slightly, with inventory levels rising and market times extending. This reflects more homes for sale than active buyers, particularly in those regions.

What This Means for Buyers and Sellers Today

For buyers, the current market is an opportunity to potentially lock in a favorable rate before rates either rise again or drop further, leading to increased competition. As interest rates slowly trend down, the buying power of consumers is increasing. However, it’s essential to stay vigilant about rate fluctuations and work with a trusted lender to get the best possible deal.

For sellers, now might be the time to list if you’ve been waiting for more demand. With interest rates at a more favorable level compared to earlier this year, more buyers are likely to enter the market, especially in high-demand areas like Orange County and San Diego.

Looking Ahead to 2025 – What Should We Expect?

Looking into 2025, the potential for lower rates could align perfectly with the spring market, traditionally the most active time of year for home buying and selling. If rates continue to trend downward, we could see a strong surge in demand as early as January, leading to a vibrant housing market.

The key takeaway for buyers is to prepare now—get your finances in order, know your budget, and work with your lender. For sellers, be ready for more activity, especially as we enter the new year.

Stay Informed and Be Ready to Act

The housing market is constantly changing, and October 2024 is no exception. As Federal Reserve policies, economic data, and mortgage rates shift, staying informed is key to making the best decisions for your housing needs.
For buyers and sellers alike, understanding these changes can help you act strategically, whether it's locking in a favorable rate, entering the market when demand is high, or timing your home sale.

If you want to stay updated with the latest housing trends, subscribe to our newsletter. Be the first to know about market shifts, interest rate predictions, and how to make the most of your buying or selling journey.

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