A new report from Redfin suggests that the Fed will likely lower interest rates before the end of the year. There are many factors behind this expected cut.
“Many people are speculating that a Fed rate cut will occur in the face of trade tensions with China and Mexico and due to the risk of low inflation,” says Daryl Fairweather, chief economist at Redfin.
Chad Okun, mortgage banker/broker with Leader One Financial Corporation, agrees.
“Aside from escalating trade tensions, we’re seeing slowing global growth and signs of a cooling economy in the US. And we are still adding jobs, but at a much slower pace,” notes Okun.
There are other reasons involved, too, says Ralph DiBugnara, president of Home Qualified.
“Over the last couple of years, we have had a backlog of buyers due to a shortage of homes for sale. So, when rates started to rise at first, it didn’t have a huge effect. This was because so many buyers were still ready to buy,” DiBugnara explains. “But with a combination of higher rates, new tax laws, and more inventory, the Fed’s policy of raising rates was stalling the market and economy even further.”
A Fed rate cut would help “get the market back to more preferred levels,” adds DiBugnara.
Robert Johnson, finance professor with Creighton University, also points to the CME FedWatch Tool.
“The CME FedWatch Tool uses future prices to gauge market expectations for interest rate cuts,” Johnson says. “This tool indicates that there’s a 98 percent likelihood that the Fed will cut interest rates by December 2019.”
How a Fed rate cut will impact home buyers
A Fed rate cut creates a domino effect.
“A chain reaction is set into motion,” says Okun. “If the Fed lowers interest rates, banks will lower their prime rate. That, in turn, affects mortgage rates, car loans, business loans, and other consumer loans. Money is cheaper to borrow, and there is an influx of credit into the economy.”
Historically, when the Fed cuts interest rates, “it has translated to a drop in mortgage rates,” Fairweather agrees. “When this happens, buyers benefit. That’s because homes become marginally more affordable. You can typically get more house for the same amount of money, since the cost of borrowing is lower.”
With a Fed rate cut, DiBugnara believes more homes will be purchased.
“That’s because the public will realize they have another opportunity to take advantage of low rates before they may rise again,” says DiBugnara.
But there’s a downside to rate cuts by the Fed.
“Lower interest rates may prop up housing prices. Potential buyers may be advantaged by lower mortgage rates. But they may suffer from paying higher home prices than they would in the absence of lower rates,” cautions Johnson.
Yet it’s impossible to know for sure how lower rates will affect buyers, Fairweather adds.
Most pros concur that a Fed rate cut is on the way.
“I expect the Fed to cut interest rates at least once this summer to bolster the economy in the face of ongoing trade tensions and stagnating economic growth,” says Fairweather.
Okun also believes in a coming rate cut.
“The Fed needs interest rates to remain low to feel the ripple effect of increased spending throughout the economy,” Okun says.
Ask Johnson and he’ll tell you a Fed rate cut of 25 basis points will likely happen twice, once in July and again in December.
But DiBugnara isn’t so sure.
“I believe we’ll see the Fed hold pat for the rest of the year, as we are already back to historically low interest rate levels,” he says.
Your next step
All of this speculation begs an important question: Buy now or wait until rates drop further?
“When it comes down to it, the best time to buy a home is when you’re ready. If you find a home that you love and current rates make it financially sensible to do so, then go for it,” Fairweather recommends.
Johnson warns that trying to time the market is risky.
“But if you have flexibility—meaning you don’t need to buy a home right now—you may want to wait and see if rates fall substantially,” says Johnson. “If that happens, I would encourage you to consider a fixed-rate mortgage and lock in while rates remain historically low.”
Lock in a historically low rate
Mortgage rates averaged more than 8% since 1971, and they are now less than half that according to Freddie Mac’s weekly survey