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Buyers have faced unprecedented challenges in the real estate market since the start of COVID-19. Record low interest rates and low housing supply during the pandemic pushed home prices to record highs, leaving many borrowers facing bidding wars. In the post-pandemic era, surging inflation caused would-be buyers to take another hit, as mortgage rates skyrocketed to their highest level since the year 2000.
Inventory remains low today and mortgage rates remain high, but frustrated buyers may soon see a light at the end of the tunnel. “All indications are the Fed will reduce short-term rates in September, said Fred Bolstad, Head of Retail Home Lending at U.S. Bank.
Many future homeowners are looking toward this important date as the opportunity they’ve been waiting for to access an affordable mortgage. Unfortunately, even if the promised rate cut occurs, some buyers may end up disappointed. Here’s why.
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What’s the mortgage interest rate forecast for September 2024?
While all signs point to the Federal Reserve cutting interest rates in September, there’s a harsh reality future buyers must come to terms with.
“It is important to keep in mind that the market has already baked in the September rate cuts,” says Sarah Alvarez, vice president of mortgage banking at William Ravies Mortgage.
Ralph DiBugnara, founder of Home Qualified, concurs.
“I do believe in anticipation of this cut, most of the reduction has been built into the market already over the last few weeks,” DiBugnara says.
The rate cut won’t come as a surprise to lenders, which is why rates are already down more than a point since their peak in the fall of 2023. Since lenders have priced in the rate drop, there’s no reason to believe the cost of a home loan is likely to decline sharply if the Fed acts as anticipated.
The Fed’s actions could, however, set the stage for continued mortgage rate drops throughout the fall and into 2025 if the central bank signals it will start to get aggressive at bringing rates back down after repeated increases to fight inflation.
“Everyone will be paying attention to how much they are reduced and what Fed talk indicates about the speed of future rate cuts,” Alvarez says.
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The Federal Reserve’s move isn’t the only factor that could affect mortgage rates
For some borrowers, a smaller-than-anticipated mortgage rate drop could come as a surprise because they don’t fully understand the relationship between the Federal Reserve’s benchmark rate and the mortgage market.
“Mortgage rates are not directly tied to the Fed fund rate,” Alvarez says.
When the Fed lowers rates, that reduces the overnight rate at which banks can borrow from each other. While banks often respond to cheaper credit by lowering the cost of consumer debt like mortgages, the Fed’s decisions are not the only things that impact the mortgage market.
“The 10-year treasury rate is another important data point,” Bolstad says. “In early August, we experienced a drop in the 10-year treasury rate. This led to a drop in mortgage rates, providing a glimpse of what actions investors could take and how it may lead to a spike in activity as rates move lower.”
The 10-year treasury rate impacts mortgage costs because mortgage-backed securities compete with treasury bonds for investor dollars.
Other economic indicators may also have an effect.
“We are seeing unemployment increase and inflation settle, which should signal further reduction over the next couple of months,” DiBugnara says.
Finally, economic and political instability may impact mortgage rates into September and beyond.
“We also have to be aware of the upcoming election. No matter what side you are on, the uncertainty of this time leads to a rocky period where we see rates jump all over the place until the results are final,” Alvarez says.
The bottom line
The bottom line is that those hoping for a low-cost mortgage or refinance loan may not find many new opportunities this month. With the September rate cut already baked in and unlikely to move the needle much, those sitting on the sidelines may need to decide whether to wait for rates to fall further or whether it’s best to move forward soon by exploring options already available today to get a mortgage with a rate under 7.00%.
