Waiting For A Fed Rate Cut Before Buying A Home? Experts Say It Won't Lower Prices – Here's Why You May Be Out Of Luck Either Way

The dream of owning a home has been slipping through the fingers of many Americans lately. With mortgage rates climbing to multi-decade highs, potential buyers waiting for a break and hoping that a Federal Reserve interest rate cut will ease their homebuying woes might soon be in for a surprise. Experts warn that it might not be the solution they're banking on.

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Jerome Powell, the Chairman of the Federal Reserve, hinted that a rate cut could be on the horizon as soon as the September Fed meeting. This glimmer of hope has had many would-be homeowners crossing their fingers, thinking that lower interest rates might make their dream homes more affordable. But experts have a different take.

Orphe Divounguy, a senior economist at Zillow Home Loans, told Yahoo Finance that a Fed rate cut won't necessarily lead to lower mortgage rates. "People are very excited about the prospect of the Fed cutting interest rates, but I don't think that lower rates will translate into lower mortgage rates immediately as some expect," Divounguy explained. "Mortgage rates are likely already reflecting Fed expectations."

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The Fed doesn't directly set mortgage rates; it controls the rate at which banks borrow from each other overnight. While this does influence mortgage rates, a Fed rate cut isn't the magic wand many buyers are hoping for. Divounguy believes that banks have already baked in the expectation of a rate cut, so when it happens, mortgage rates may not budge. Worse yet, if the Fed doesn't cut rates as much as expected, mortgage rates could climb.

Divounguy also pointed to other factors that could keep rates high. "Growing fiscal deficits and the government's need to borrow to fund its operations mean the pressure on yields isn't likely to abate anytime soon," he said. "We just got these Q2 GDP numbers that show the economy is pretty strong. That will likely put upward pressure on yields."

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But there's another twist to the story. Some experts believe that if the Fed does cut rates, it could cause home prices to soar. Bill Pulte, CEO of Pulte Capital and Barbara Corcoran, a real estate mogul and "Shark Tank" star, issued stark warnings in interviews with Fox Business. Pulte said, "If the Federal Reserve comes in and reduces rates, you could see home prices go up, in my opinion, 5, 10, 20%. That would be just insane."

Corcoran echoed this sentiment: “If rates go down just another percentage point, prices will go through the roof. Everyone will come out and buy. There are probably ten buyers on the sidelines waiting for interest rates to come down compared to those active in the market. So everybody's going to charge to the market."

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So, what's a potential homebuyer to do? Experts suggest that if you're well-qualified and can afford today's rates, now might be the time to act. If prices skyrocket after a Fed rate cut, you could have instant equity in your new home. And remember, if rates do drop later, you can always refinance and lock in a better rate. 

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