The Federal Reserve is expected to cut interest rates this Wednesday after holding them at a 23-year high for over a year. This move has raised hopes that the sluggish U.S. housing market might finally be on the upswing.

Mortgage rates have skyrocketed since 2020, making it one of the most unaffordable housing markets we’ve seen in a long time. While the Fed doesn’t directly control mortgage rates, their decisions do impact borrowing costs across the board.

So, what does this mean for homebuyers? An interest rate cut could help ease the pressure on mortgage rates, making it a bit more affordable to buy a home. This is great news for first-time buyers and current homeowners who’ve been hesitant to sell in this high-interest environment. However, it could also lead to more intense competition among buyers.

In fact, mortgage rates have already started to drop in anticipation of the Fed’s decision. Freddie Mac reports that the average 30-year fixed mortgage rate dipped to 6.20% last week—the lowest it’s been since February 2023 and significantly down from last year’s peak of 7.79%.

A single percentage point drop in mortgage rates may not sound like much, but it can save buyers hundreds of dollars a month. Let’s say you’re buying a home for $422,600, the median price in the U.S., and putting down 20%. If you secure a 6% mortgage rate instead of 7%, you’d save more than $2,600 a year in interest alone.

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Breaking the “Lock-In” Effect

One of the key issues impacting the housing market is supply. Many homeowners who locked in ultra-low mortgage rates during the pandemic have been reluctant to sell. This has driven fierce competition for the few homes on the market, often leading to bidding wars.

Lower rates could finally break this “lock-in” effect.

“There are plenty of homeowners who wanted to sell but didn’t because they couldn’t afford a new mortgage at today’s rates,” says Daryl Fairweather, chief economist at Redfin. “As rates fall, it becomes more feasible for these folks to sell and buy again.”

That said, it’s unlikely we’ll see rates drop back to pandemic-era lows when the Fed cut rates dramatically to prop up the economy, Fairweather cautions.

Most experts expect the Fed to cut its benchmark rate by just a quarter-point on Wednesday. While more cuts are likely down the road, there’s no clear timeline for when they’ll happen.

“A lot of people locked in mortgage rates at around 3%, and we’re not going back there,” Fairweather notes.

Wells Fargo predicts the average 30-year fixed mortgage rate will be 6.5% by the end of 2024 and 5.9% by the end of 2025.

If you bought a home in 2022 or 2023, you might be tempted to refinance as rates drop. Fairweather suggests waiting until the new rate is at least one percentage point lower than your current rate.

“If you locked in at 7.5%, you may already be in a good position to refinance,” she says. “But if it were me, I’d wait and see where rates go.”

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The Double-Edged Sword

For potential homebuyers eager to jump back in, lower mortgage rates could be a bit of a double-edged sword.

While falling rates could boost your purchasing power, they may also attract more buyers, driving home prices even higher.

“It’s one of those situations where you have to be careful what you wish for,” warns Greg McBride, chief financial analyst at Bankrate. “A drop in mortgage rates could spark a surge in demand, making it even tougher to buy a house.”

Another factor that could influence demand is a recent rule change by the National Association of Realtors (NAR). The new rules, which took effect on August 17, change how the 1.5 million NAR real estate agents are paid when helping clients buy and sell homes.

“It’s been a bit tricky to navigate the housing market with this rule change,” Fairweather explains. “I think a lot of buyers are waiting until next year to make a move.”

While falling mortgage rates may make buying a home more appealing, it shouldn’t be the only factor in your decision, says Leo Pareja, CEO of eXp Realty, one of the largest brokerages in the U.S.

“I always tell people, focus on what you can afford,” Pareja says. “Your home is where you raise your family. It’s about lifestyle, proximity to schools, and other important factors. It’s not just about investment returns.”

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