Many prospective homebuyers are eagerly awaiting the Federal Reserve’s next move, hoping for some relief from the high mortgage rates that have been making homeownership less affordable. However, even with an anticipated rate cut from the Fed, those hoping for a dramatic reduction in mortgage rates may be left disappointed.
While the average 30-year mortgage rate has already dropped more than a full percentage point since early May—currently hovering around 6.2%—the Fed’s upcoming rate cut is unlikely to bring about a significant further decline in mortgage rates, according to housing market experts.
“We’ve already seen a lot of the benefits of a rate cut reflected in the form of lower mortgage rates,” said Danielle Hale, chief economist at Realtor.com. “It’s not so much about what the Fed does this week, but rather what they signal about future moves that could lead to continued declines in rates.”
The Fed has been signaling its intent to cut rates to stimulate economic growth, especially in light of mixed economic data. Inflation has broadly moderated, but stubborn price increases in key sectors, including housing, remain a concern. Additionally, while fewer jobs were added to the U.S. economy last month than expected, wage growth has been strong—keeping inflationary pressures alive.
Market analysts are split on the scale of the rate cut at the Fed’s upcoming meeting. According to CME FedWatch data, traders predict a 65% chance of a 50-basis-point cut, with a 35% chance of a smaller 25-basis-point cut. Many expect that the Fed will implement additional rate cuts when they meet again in November and December, potentially lowering the benchmark interest rate by 100 basis points from the current 5.25% to 5.5% range by the end of the year.
However, housing experts caution that a series of cuts may not lead to the drop in mortgage rates that many consumers expect. Chen Zhao, who leads economic research at Redfin, warns that mortgage rates could even rise slightly in the coming months if the Fed cuts rates more slowly than anticipated. “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 explained.
Historically, mortgage rates do not always fall in tandem with Fed rate cuts. The last pre-pandemic rate-cutting cycle serves as a good example. In late 2018, average mortgage rates peaked at nearly 5%. By the time the Fed began cutting rates in July 2019, mortgage rates had already fallen to around 3.75%. Despite additional Fed rate cuts, mortgage rates stayed relatively stable, fluctuating between 3.5% and 3.8% for the rest of the year. This suggests that many of the anticipated benefits of the Fed’s actions may already be priced into current mortgage rates.
So why are so many homebuyers expecting mortgage rates to drop further after the Fed cuts rates? According to Kelly Shue, a professor of finance at the Yale School of Management, this expectation is due to a common cognitive bias known as “categorical thinking.” In a recent paper co-authored with researchers Richard Townsend and Chen Wang, Shue found that both consumers and professional forecasters tend to overestimate the connection between short-term interest rates, like the federal funds rate, and longer-term rates, such as those on mortgages.
Categorical thinking simplifies complex information by grouping similar concepts together, making it easier to process. However, this mental shortcut can lead to errors when people fail to consider the nuanced differences between different types of interest rates. “These categories are useful,” Shue explained, “but where it can lead to mistakes is when people don’t think carefully about the differences among items in the same category.”
Shue advises buyers not to wait for further rate cuts if they find a home they like at a current mortgage rate. “For most long-term mortgage loans, there’s no reason to try and time the market. If you’re in the market for a home now, it’s better to act rather than gamble on a slight drop in rates,” she said.
Kristin Bailey, a senior loan officer based in Austin, Texas, agrees with this sentiment. Many of her clients are already reaching out, eager to take advantage of the potential rate cuts, but she urges them not to delay. “Pretty much everyone I speak with wants to know what they should do after the Fed’s rate cut,” Bailey explained. “But I often tell them, ‘Let’s talk now.’ It’s not always wise to wait.”
Even if mortgage rates don’t drop substantially, prospective buyers may find some relief in the housing market itself. Available housing inventory has been rising steadily throughout the year, reaching more than 909,000 homes in August, a post-pandemic high according to Realtor.com. Additionally, median monthly mortgage payments have decreased by roughly $300 since rates peaked at over 7% in May, improving affordability for many buyers.
Looking ahead, Hale believes the housing market may stabilize in the coming years. “If you look at past cycles, the housing market tends to return to long-run averages. If that’s the case, then 2025 will be the year,” she said.
While the Fed’s rate cuts may provide some short-term relief, experts suggest buyers manage their expectations and act sooner rather than later if they’re hoping to lock in a mortgage at a favorable rate.
