What the Fed’s rate cut means for Minnesota home buyers and sellers

The Federal Reserve slashed interest rates by a half point Wednesday, a move that could have many implications for consumers including lower borrowing costs on credit cards. Lower mortgage costs also could follow.

But is the cut enough to unlock the Twin Cities housing market and the average consumer’s ability to either buy their first home or upsize from a starter home? We asked the experts to explain how it all might add up.

Will mortgage rates keep falling?

First, it’s important to note that mortgage rates aren’t tied directly to the Fed Fund rate — they’re buffeted by other economic forces (it’s complicated) and tend to more closely track the yield on a 10-year Treasury bond, which rises and falls based on investor sentiment, so while the Fed cut its rate a half percentage point, don’t expect a corresponding decline in mortgage rates.

Second, it’s important to note that while there is an expectation that rates could decline a bit more over the coming year, there’s also been an expectation that the Fed would reduce its key lending rate, so that cut is essentially already baked into today’s rates.

In fact, after the Fed’s rate cut Wednesday, the yield on the 10-year Treasury bond increased a wee bit; if that trend continues, mortgage rates could follow in the coming weeks.

That’s unlikely, economists say. Instead, though there are contrarians, the consensus is that mortgage rates are on a downward trajectory. Expect further declines, though nothing significant.

How much more are rates likely to fall over the next year or so?

Do you have a reliable crystal ball? Even the smartest economists don’t.

There is, however, a consensus that rates are likely to continue their downward trajectory, but not much more than a percentage point and definitely not enough to trigger the kind of buying spree that sent the housing market bonkers during the pandemic.

Rates are already at their lowest level in more than a year. On Thursday, Freddie Mac released a weekly survey that showed the average rate on a 30-year fixed-rate mortgage dipped to 6.2%. That’s down slightly from the previous week and about a full percentage point lower than a year ago.

If I bought a year or two ago, when rates were a percentage point higher than right now, is it time to refinance?

Possibly. Fred Bolstad, head of retail home lending at U.S. Bank, said the decision to refinance should be based not only rates, but also on your circumstances, namely how long you plan to stay in your house.

Refinancing isn’t without cost. Bolstad said that in the past two months, the company has helped a number of buyers who bought with rates in the 7% to 8% range refinance with a 1.5% interest rate reduction.

“If you bought in the last year, this is a good time to look at your rate, today’s rate, and understand the cost-savings scenario to see what makes sense for your situation,” he said.

Will I ever see another 3% rate for a 30-year FRM?

In real estate, never say never. But probably never. Those record low mortgage rates, which hovered in the 2% to 3% range from the end of 2020 and into early January 2021, were the result of once-in-a-lifetime circumstances that triggered an especially radical and unusual response from the federal government. That intervention triggered a homebuying boom that caused home prices to break records month after month.

Though those rates are now in the rearview mirror, it’s important to maintain some perspective. While mortgage rates have more than doubled over the past two years — peaking at 7.22% in May — they’re actually now slightly below historical averages.

“I’ve been in the mortgage business for 35 years, starting as a loan originator and have seen rates in the midteens,” said Bolstad. “But I realize many of today’s buyers don’t have that context. The record-low rates we experienced in 2021 aren’t something we’ll likely see again anytime soon.”

Will the decline in mortgage rates drive home sales?

Likely. There’s no doubt higher mortgage rates have stifled home sales, especially those that are affordable to starter home buyers who are most rate sensitive. Already, declining rates have triggered a 5% week-over-week increase in mortgage applications.

If you’re wondering how rates impact homebuying, consider what happened during the first week of September when rates fell to 6.11%. During that week alone, there was an immediate 10% increase in signed purchase agreements that came after four consecutive weeks of annual declines and ho-hum mortgage rates, according to data from the Minneapolis Area Realtors (MAR).

David Arbit, MAR’s director of research, said that if rates dip to 6% or below, that could force an untold number of buyers — and sellers — off the sidelines and trigger a sales boomlet. The timing of such a decline couldn’t be better. But over the past several months, there’s been a bigger decline in sales than listings, leaving buyers with more options than they had last year.

So the upside for buyers right now is that rates are coming down at a time when listings are on the rise.

“Whether it’s enough to satisfy the pent-up demand from the last couple years — and whether builders can produce enough units as well — remains to be seen,” Arbit said.

What does that mean for house prices?

Though pending home sales in the Twin Cities metro area have been down four months in a row, there are still more buyers than sellers in some parts of the metro. And that means prices have still managed to eke out modest gains compared with last year. If sales suddenly rise, price gains will likely accelerate, potentially erasing some of the savings buyers will gain by locking in a lower rate. For buyers, there’s a lot to consider.

Will lower rates do anything to increase the supply of house listings?

Very likely. The vast majority of Twin Cities homeowners with a mortgage have a rate that’s far below 6%. Those mortgages, while coveted, are also referred to as “golden handcuffs” because they’ve made it difficult for people to list their house, even if it no longer serves their needs. That’s been especially true for first-time buyers. But with rates falling, the gap between the rate on those “golden handcuff” mortgages and the current rates is narrowing, creating a little more incentive to make a move.