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Feds Cut Interest Rate by Half Point – Property Investors Buy Before Housing Prices Surge

On Wednesday, The Federal Reserve made a significant move to lower its benchmark interest rate by 0.50 percentage points, or double the usual 0.25 percentage point cut. The move, approved by 11 out of 12 Fed voters, lowers the benchmark rate to a range between 4.75% and 5%, down from the previous range of 5.25% to 5.5%.

The call for such a large cut was based on a few factors, which Federal Reserve Chair Jerome Powell touches on: “We know it is time to recalibrate our (interest rate) policy to something that’s more appropriate given the progress on inflation. We’re not saying, ‘mission accomplished’ but I have to say, though, we’re encouraged by the progress that we have made. The U.S. economy is in a good place, and our decision today is designed to keep it there.”

Experts note that, although the rate cut was large, it’s unlikely to significantly affect mortgage rates in the short term. However, the Fed’s move is projected to keep mortgage rates on their current steady downward trajectory. This, in turn, is expected to push housing prices up further, which is prompting real estate investors to buy now to capture lower prices and future equity.

Related Article: Investors Buy to Secure Equity as Home Prices Continue to Rise

Federal Reserve Cuts Benchmark Interest Rate for the First Time in Four Years

This marks the Fed’s first benchmark interest rate cut in four years, wrapping up a prolonged stretch of rate increases. It doesn’t seem that it will be the last cut either, more rate decreases have been penciled in for November and December, with a projection of an interest rate of 4.4 by year’s end.

Will there be another significant rate cut, though? It could be a possibility based on Powell’s comments. Goldman Sachs economists notes: “We see the choice between a 25bp and 50bp cut in November as a close call,” Powell “said that 50bp should not be assumed to be the new pace, but he emphasized that the FOMC will be ‘making decisions meeting by meeting based on the incoming data.” 

Mortgage Rates Lower as Housing Prices Rise – Fed Rate Cut

Such a dramatic cut of 0.50 percentage points was not anticipated by everyone. However, the CME FedWatch tool reported that the chances of a 50-basis-point rate cut elevated from 25% last month to 64% just one day before the cut occurred.

The Dramatic Rate Reduction Sparked Claims of Political Motivation

Some claim there was no real legitimate reason for a rate cut of this size, which has sparked talk of the decision being a political move to boost sentiment as election day approaches. Fueling the speculation further, a handful of Democrats, including Elizabeth Warren, urged Powell for an even larger rate cut of 0.75 points when a cut of that size is typically only put in place when the economy is in serious trouble. Trump’s response on this was clear, “To cut it by that much, assuming they’re not just playing politics, the economy would be very bad, or they’re playing politics.”

Powell denied allegations of being politically motivated, stating, “We’re not serving any politician, any political figure, any cause, any issue. It’s just maximum employment and price stability on behalf of all Americans. And that’s how the other central banks are set up, too. It’s a good institutional arrangement, which has been good for the public, and I hope and strongly believe that it will continue.”

Wall Street’s Reaction to the Fed’s Considerable Rate Decrease

As for Wall Street, following the Federal Reserve’s announcement, stocks initially surged but later finished the day on a weaker note. The S&P 500 experienced a decline of 0.3%, while the Dow Jones Industrial Average decreased by 0.25%. U.S. Treasury yields (US10Y) experienced a slight uptick as traders offloaded bonds following the Federal Reserve’s latest rate decision, rising by five basis points. Prior to the central bank’s announcement, the US10Y was approximately 3.66%. However, after the decision to cut interest rates by 50 basis points, it climbed to 3.71%.

The Impact on the Housing Market and Real Estate Investors

Analysts are reporting that the rate cut won’t have a big impact on mortgage rates in the beginning. The reason for this is because the expectation of this rate cut has already been pushing mortgage rates down, so they are ahead of the game. As of Thursday, September 19th, Freddie Mac places the 30-year fixed mortgage rate at 6.09%.

Federal Reserve Rate Cut Will Lower Mortgage Rates But Will Cause Housing Prices to Rise

Although mortgage rates are lower, there’s still the issue of the rates being well above what they used to be, keeping homeowners from selling to hold on to their affordable rates. However, with rates coming down, gradually, more sellers will eventually let go, placing more houses on the market. But for now, the low inventory problem exists, which keeps prices high. Some say there’s a double-edged sword at play here because housing prices are high in the current situation, but as the market starts to open up more as mortgage rates fall further, renters will start to come out of the woodwork to buy, competition goes up, and so do housing prices.

Daryl Fairweather, chief economist at Redfin discusses this same point of sellers and buyers finally making their move when rates lower, as she comments, “If the Fed takes a more dovish turn, I think we could get down to around 6%,”  “And I think if we even go down to 5.9%, that would be really psychologically impactful to the housing market. I don’t think it’s going to get us all the way back to pre-pandemic existing inventory. But it could get a lot of people off the fence.”

Property Investor’s Would Be Wise to Buy Before Home Prices Rise Further

It’s clear that mortgage rates will continue to lower, which will cause the housing market to flood with buyers, making properties even more unaffordable. With profit in mind, real estate investors would be wise to jump on a purchase now before the expected uptick in housing activity occurs. This will allow investors to lock in a lower price. It will also be to their advantage to buy quickly before prices rise because it will enable them to capture equity in the months to come.

Rental real estate investors who decide to wait for the next Fed meeting for interest rates to lower further, and mortgage rates to decline more, would be making a huge financial mistake. This is the case because you can always refinance when the mortgage rates lower, but you can never change the higher price you’ll pay for a property if you wait, thousands of dollars would be lost.

Work with a Full-Service Real Estate Company to Make it Happen

To buy rental real estate quickly before the housing market shifts again can be tricky since there are so many moving parts to make it happen. However, working with a full-service investment company can solve this issue.

Morris Invest provides new construction rental properties to their clients with a tenant and property manager in place, making it super simple to own rental real estate. And because a tenant is placed either before or at closing, rental income starts rolling in immediately.

Related Article: Demand for Build-to-Rent Homes Surging with New Starts and Completions Outpacing Last Year’s Data

Give Morris Invest a call to discuss what properties are still available and how we can help you achieve financial independence through real estate investing. In the meantime, view the following power resources to kickstart your investing journey:

You’ll also want to dive into the following video that details why waiting to invest could be a dangerous financial game:

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