Think A Quarter or Half-Point Fed Cut Will Make Homes More Affordable? Just The Opposite May Happen – Here's Why

Over the past few weeks, speculation has grown about whether the FED will cut interest rates and by how much. At first, Wall Street speculated on a quarter-point rate cut, but the CME Group's Fed Watch now says the market is pricing in a 63% possibility of a 50 basis point rate cut.

Many popular media outlets have created the notion that any interest rate cuts will make homebuying more affordable. But this may be a fallacious argument. 

Trending Now:

• A billion-dollar investment strategy with minimums as low as $10 — you can become part of the next big real estate boom today.
  This is a paid advertisement. Carefully consider the investment objectives, risks, charges and expenses of the Fundrise Flagship Fund before investing. This and other information can be found in the Fund's prospectus. Read them carefully before investing.
• Can you guess which type of investments Morgan Stanley says will reach $2.7 trillion by 2027? It even offers up to 20% APY potential to accredited investors with up to $500 in bonuses for new users.

Consider the following:

·       Mortgage rates are based on the 10-year Treasury yield, which has already moved lower in anticipation of a Fed interest rate cut. It's possible that mortgage rates could hold steady or even move up, depending on what the Fed does.

·       Many prospective buyers have been sitting on the sidelines, awaiting the Fed's move before bidding on a house. Any increase in demand will make home prices rise.

·       Lower mortgage rates make loan payments cheaper, but rising or falling home prices affect monthly payments more than interest rates. 

The following chart shows the amount of money needed for down payments and the monthly payments on a 30-year fixed loan (principal and interest, or P&I) on three different home prices with three different interest rates:

HOME PRICE	15% DOWN PYMT *	LOAN AMOUNT	MONTHLY P&I @ 6.5%	P&I @ 6.25%	P&I @ 6.0%
$400,000	$60,000	$340,000	$2,149	$2,094	$2,038
$450,000	$67,500	$382,500	$2,418	$2,355	$2,293
$500,000	$75,000	$425,000	$2,686	$2,617	$2,548

* The median down payment on a home ranges from $5,800 to $98,700 and varies by state, but the national average is 15.0%.

Notice that the savings from a decline in interest rates are completely offset as the home price rises. According to the Federal Reserve, the second-quarter median home sales price in the U.S. was $412,300, a decrease of $6,200 year over year and well below the peak price of $442,600 in the fourth quarter of 2022.

While the decreasing median price makes homes more affordable, the decline has only happened because of weaker demand over the past few years. In 2023, approximately four million existing homes were sold, down 32% from 6.12 million in 2021.

Keep Reading:

• This billion-dollar fund has invested in the next big real estate boom, here's how you can join for $10.
  This is a paid advertisement. Carefully consider the investment objectives, risks, charges and expenses of the Fundrise Flagship Fund before investing. This and other information can be found in the Fund's prospectus. Read them carefully before investing.
• Commercial real estate has historically outperformed the stock market. This platform allows accredited investors to invest in commercial real estate, invest today for a 1% boost.

However, demand is expected to rise in 2024 and 2025, with the projected number of sold homes at 4.62 million and 5.35 million, respectively. This means the likelihood of prices declining further is low and prices are more likely to rise as demand increases. 

The chart numbers also do not include funds needed for closing costs, taxes and insurance. With the recent lawsuit against the National Association of Realtors, buyers may also have to pay an agent commission.

Therefore, this popular media idea that millions of young buyers in the Millennial and Gen Z groups will suddenly be able to buy a home after a rate cut or two is pure fantasy. A quarter-point or half-point cut will not matter until and unless home prices drop even further.

Plus, many in these demographic groups have given up on being able to buy a home and have chosen instead to spend money now, running up credit cards to maximum levels.

In short, consumers will welcome any interest rate cuts, but don't expect a huge difference in home affordability. 

Earn Income From Real Estate Without Being A Landlord

The current high-interest-rate environment has created an incredible opportunity for income-seeking investors to earn massive yields and you don't have to own property to do it…  

The Arrived Homes investment platform has created a Private Credit Fund, which provides access to a pool of short-term loans backed by residential real estate with a target 7% to 9% net annual yield paid to investors monthly. The best part? Unlike other private credit funds, this one has a minimum investment of only $100. 

Looking for fractional real estate investment opportunities? The Benzinga Real Estate Screener features the latest offerings.