Continuation of Interest Rate Hold by the Fed and Its Implications for Home Purchasers and Property Vendors

The Latest on the Federal Reserve and the Housing Market

In the fourth meeting of 2025, the Fed dropped a bombshell. They've decided to leave the benchmark interest rate unchanged – a decision that's bound to have some spillover effects on the housing market. After three consecutive rate cuts in 2024, this pause is a game-changer!

You might wonder, what does this mean for your mortgage payments? Well, let's dive in!

Mortgage rates dropped significantly in the lead-up to the Fed's first rate cut, from 8.01% in October 2023 down to 6.20% in September 2024, according to Bankrate's survey of big-name lenders. However, mortgage rates jumped 7% in January, even after the Fed's year-end rate reductions.

So, what gives? The Fed doesn't directly control mortgage rates, but they do have a significant impact. Mike Fratantoni, the chief economist at the Mortgage Bankers Association, shares his take: "A Fed on hold aligns with our forecast for little change in mortgage rates for now."

The Impact on the Housing Market

With inflation tapering off since 2022, the Fed's rate hikes are now history. But those hikes did slow the real estate market down. Sales slumped, but home prices hit record highs due to the intricate factors that influence the market.

While higher rates present difficulties for both homebuyers and sellers, they may not hold the market back forever. Lisa Sturtevant, chief economist at Bright MLS, predicts that a drop in mortgage rates later this summer could give the housing market a jolt, encouraging previously sidelined buyers to take advantage of lower rates and expanded inventory.

The Fed and Mortgage Rates – Not as Simple as You Think

The Federal Reserve doesn't set mortgage rates, but they are definitely a catalyst. Mortgage rates usually move in tune with 10-year Treasury yields, explains Greg McBride, Bankrate's Chief Financial Analyst. "If mortgage rates are going to come down in any meaningful way, inflation needs to resume its downward trend to 2%."

In 2024, despite the Fed's rate cuts totaling a full percentage point, mortgage rates kept climbing, thanks to persisting inflation, stronger-than-expected economic growth, and concerns about government borrowing.

The Role of the Fed in a Rising Interest Rate Scenario

When interest rates rise, as they did in 2021, the housing market slows down significantly. Sales volume remains low, but home prices keep soaring. Don't count on a housing crash anytime soon – history shows that home prices and sales have been resilient in the face of rising mortgage rates.

The elevated mortgage rates and steep home-price growth over the past few years have strained affordability, but if rates eventually relax, affordability issues will become less pressing. For instance, borrowing $320,000 with a June rate of 6.86% translates to a monthly payment of $2,099, while the same loan would set you back $2,348 at an 8% rate – that's a difference of $249 per month!

A continued decline in mortgage rates could trigger a new challenge: a flood of new buyers entering the market and further straining the currently limited housing supply.

Strategies for Borrowers

If you're planning to buy a home, here are a few tips to help you navigate the changing mortgage rate landscape:

Shop around for a mortgage: It pays to be a savvy shopper and compare rates from different lenders.
Be choosy about ARMs: Adjustable-rate mortgages might look appealing, but McBride suggests staying away from them. The potential for increased rates in the future outweighs any upfront savings you might enjoy.
Consider a home equity loan or HELOC: With mortgage refinancing still sluggish, many homeowners are tapping into their home equity using HELOCs. If you need to make home improvements but have a low-interest mortgage, it could make sense to take out a HELOC, even if it comes with a higher rate.

Remember, prospective homebuyers should keep a watchful eye on inflation, as lower inflation tends to push Treasury yields and mortgage rates down[1][5].

[1] https://www.federalreserve.gov/monetarypolicy/openmarket.htm[2] https://fred.stlouisfed.org/series/MORTGAGE30USQTZ6NVA[3] https://www.bankrate.com/mortgages/[4] https://www.census.gov/housing/hvs/[5] https://research.stlouisfed.org/publications/ pages/road-to-normal/visit-our-faq/

Investing in real-estate could become more attractive with the Fed's decision to leave the interest rate unchanged, as mortgage rates might drop due to the slowdown in the housing market.
As the Federal Reserve influences the 10-year Treasury yields, business owners and investors looking to invest in finance should monitor these trends closely, as they can impact mortgage rates and the housing market.

Continuation of Interest Rate Hold by the Fed and Its Implications for Home Purchasers and Property Vendors