The Real Impact of Falling Mortgage Rates

The Federal Reserve has hinted at lowering rates in the near future, sparking conversations about what that could mean for the housing market. Let’s break down the factors that influence mortgage rates, where experts think rates are heading, and what this could mean for the housing market in the months ahead.

MORTGAGE RATES 101

The Federal Reserve doesn’t directly set mortgage rates. Instead, it adjusts the federal funds rate, which is the rate banks charge each other for overnight loans. While Federal Reserve rate adjustments send signals about the broader direction of borrowing costs, they don’t always dictate the direction of mortgage rates.

Mortgage rates are more closely tied to another benchmark: the 10-year treasury yield. Because mortgages are long-term loans, investors see the 10-year treasury as the closest in terms of safety and duration.

So, where are rates headed?

• Today: The average 30-year fixed rate is sitting at about 6.5-6.6%. 

• Outlook: Over the next 12 months, most experts expect rates to remain steady in the mid-6s, with some predicting a decrease to the low-6s.

WILL LOWER RATES BRING BACK BUYER DEMAND?

For simple math, let’s assume rates fall to 6% in the next 12 months. On a $250,000 loan (which is about the average loan amount in the US), here’s how the math works out on a borrower’s monthly payment:

As seen above, going from a 6.5% to 6.0% mortgage interest rate only reduces the monthly payment by $81.29 per month.

While every dollar counts, this small savings is unlikely to dramatically shift buyer behavior. In fact, recent polls suggest that most buyers are going to continue to sit on the sidelines until rates drop to the 4-5% range and/or home prices drop an additional 5-10%. 

Bottom Line: While there is a lot of excitement around falling rates in the coming months, there are simply bigger economic factors at play that are likely to keep affordability and buyer demand low.

With that said, there are still thousands of homes selling in Tampa every month, so as long as you’re strategic in your real estate moves, there are still plenty of opportunities to win even in this market.

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