In a bold move, the Federal Reserve just cut interest rates by 50 basis points (0.5%), marking the first time in four years that such a significant reduction has occurred. For those in the real estate market, this could be the perfect moment to make a move. Historically, interest rate cuts like this often lead to lower mortgage rates, which directly impacts your borrowing power and the overall cost of your home. Let’s break down why this matters and why now might be the best time to buy a home or invest in real estate.

The Timing of Rate Cuts and Mortgage Rates

The last time the Fed made a major cut like this was in 2020 during the early stages of the pandemic. Mortgage rates dropped significantly afterward, creating a surge in demand for housing. But this time, things are different. The Fed, led by Chair Jerome Powell, has been criticized for starting to raise rates too late to combat inflation and for possibly delaying this rate cut longer than necessary. Now, Powell has signaled that further rate cuts could be on the horizon to address rising unemployment and economic uncertainties that are troubling markets and political leaders alike.

Historically, there’s a lag between Fed rate cuts and mortgage rate reductions, meaning savvy buyers can get ahead of the curve. The Mortgage Bankers Association has noted that mortgage rates typically decrease a few weeks after a Fed cut, but these lower rates may not last long as market conditions quickly shift. Some, however, suggest that the markets may have already anticipated this cut and priced it in to mortgage rates already. That said, very few people expected the cut to be as much as 50 bps.

A Wounded Housing Market in Recovery

The housing market has been in a difficult position recently, with high interest rates, low inventory, and soaring home prices creating substantial barriers for many potential buyers, especially first-time homebuyers. The Federal Reserve’s earlier actions during the pandemic—slashing rates to historic lows—fueled a hot real estate market as consumers emerged ready to spend. But when rates began to climb again, home sales slowed to a crawl. In late 2023, mortgage rates reached their highest point in two decades, peaking above 7.75%, which pushed many buyers out of the market and led to a significant drop in home sales.

However, despite the sharp decline in transactions, home prices remained elevated. Many homeowners who had locked in mortgages at historically low rates had little motivation to sell and re-enter the market at a much higher interest rate. As a result, inventory stayed tight, keeping prices from dropping significantly.

That said, there’s reason for optimism. Both new and existing home sales saw an increase in July, signaling that more buyers are entering the market again. As mortgage rates continue to decline, it should help loosen up some of the supply, which could slow the rapid rise in home prices.

Interest Rates & Property Taxes: The True Impact on Monthly Payments

One of the most overlooked factors when purchasing a home is the significant role that interest rates and property taxes play in determining your monthly payment. Many buyers tend to focus too heavily on the price of the home, missing the bigger picture. A small reduction in interest rates or securing an interest rate buy-down can have a greater long-term impact on your total homeownership costs than a price reduction.

On a personal note, when we purchased our home, we were able to secure a 2.75% interest rate, which significantly reduced our monthly payment. Even though the home’s price point was higher than average, the low rate made our payment comparable to someone buying a home today at 40-50% less in price, but with a higher interest rate. This underscores the importance of focusing on your monthly payment rather than just the home’s price.

At Adam Timothy Group, we always remind our clients to focus on their monthly payment, ensuring they manage both their equity and appreciation while also balancing their monthly cash outflows.

A Golden Opportunity for Investors

For real estate investors, this rate cut also presents a unique opportunity. While the rental market is currently somewhat depressed, with cap rates lower than they were in recent years, this may be the ideal time to lock in deals. The rise in inventory is slowing, and rents are expected to increase again soon. Investors who move now may be able to capitalize on lower purchase prices and financing costs before rental rates climb, improving their returns over the long term.

Why Act Now?

With Powell indicating that more rate cuts could be on the way to combat economic challenges like rising unemployment, now may be your best opportunity to take advantage of lower interest rates. Lower rates can save buyers and investors tens of thousands of dollars over the life of a mortgage, and with inventory still higher than it has been in recent years, you have more options to choose from without the intense competition seen in previous years. According to Forbes and the Wall Street Journal, experts predict that mortgage rates will decrease in response to the Fed’s move, but the window may be short as market conditions change rapidly.

The Fed’s decision to cut rates likely came later than it should have, and there’s no telling when or if rates will be reduced again soon. Waiting too long could mean missing out on these lower rates and more favorable buying conditions.

At Adam Timothy Group, we’re here to help you navigate these shifting tides. If you’re thinking about buying a home or investing in real estate, this may be your best chance to lock in lower rates and secure your dream property before the market heats up again.