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Should we expect mortgage rates to drop significantly once the Fed cuts rates?

The timing to buy a house is perhaps the biggest challenge for first-time homebuyers, especially under these macroeconomic conditions where mortgage rates are quite volatile, and interest rates remain quite high. Over the last two years, the Federal Reserve kept interest rates relatively high for two, making the cost of borrowing expensive for asset buyers.

Since December 2023, mortgage rates have been more stable, fluctuating between 6.5%  and 7%. However, many are now wondering if rumored Fed cuts will change that. “As the market gains more certainty and as inflation curbs, it is very likely that there will be rate cuts this year. Currently, Fed Funds futures contracts have three rate cuts built in starting in the second half of this year,” said Scott Haymore, senior vice president and head of mortgage capital markets and product management at TD Bank.

Fed Chair Jerome expressed concerns, however, over inflation as he is convinced that inflation remains too sticky for interest rates to be cut. Interest rates are still above 5% and the cost of borrowing, and mortgage rates remain unaffordable for most people who expect or hope these rates to drop. Securing a house with the average 30-year fixed mortgage interest rate of 6.5% seems like a very bad investment, especially once interest rates are cut.

If the Federal Reserve cuts interest rates as many expect, the main question then is how far can one expect mortgage rates to drop? According to some experts, a few scenarios may occur. First, mortgage rates may drop around 6% or below by the first quarter of 2025. Second, mortgage rates may remain steady in 2024 despite federal fund rates being cut. This could happen because demand may skyrocket as a result of the drop. Thus, to avoid that the demand for housing outpaces home availability, rates might remain high. According to Afifa Saburi, who’s a capital market analyst for Veterans United Home Loans, mortgage rates won’t fall much from where they are today because the rate cuts that the Fed has penciled in are already priced in by the markets, which means that almost all of the rate relief that we would see from rate cuts are already here. Third, another expert, Jeremy Schachter, who is the branch manager at Fairway Independent Mortgage Company, thinks that mortgage rates will hold steady through mid-2025. He argued that rates will stay at 6% and won’t fall much in 2024 or even early to mid-2025.

In short, mortgage rates will not drop significantly once federal fund rates are cut. The number of first-time homebuyers who expect to take advantage of the rate cut will be reduced as mortgage rates will remain unaffordable for most of them.

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