A sizable September Fed cut could be on the way
Expectations of a big Federal Reserve rate cut in September have swelled during the past week amid rising unemployment and the sudden prospect of a recession.
Fed chair Jerome Powell’s language after last week’s rate decision suggested the door was open for a move to lower rates in its next announcement – and that darkening economic outlook now has markets pricing in the likelihood of an even bigger cut than first anticipated.
At time of writing, CME Group’s FedWatch tracker showed a 55.5% chance that the central bank would slash rates by 50 basis points on September 18, compared with a 44.5% prospect of a 0.25% cut.
The likelihood that rates will dip just over a month from now could see buyers gear up to re-enter the market in September – but is there anything to be gained from making a move before rates drop?
Yury Shraybman (pictured top), of Innovative Mortgage Brokers, told Mortgage Professional America that the chance of an uptick in activity, and a possible return to greater competition and bidding wars once rates fall, meant buyers who were in a position to buy could benefit from doing so now.
For Shraybman, it’s a question of supply and demand. “Right now, the demand is still there. However, when the rates go down, I feel like the demand is significantly going to increase,” he said. “I don’t think anything [big] is going to happen with the supply because even people that are waiting to sell their property right now are going to need to buy another property.”
How could buyers benefit from pushing ahead with a purchase?
Home prices have leveled off in many markets since the recent downturn but could start to climb if activity intensifies, he added, while hopeful buyers are also likely to face an array of competing offers. “I feel like the prices are going to be much higher and the competition is going to be much higher,” he said.
“For example, about a year and a half ago in my area, sellers were getting about 10 to 20 offers on the house. Now with the rates being higher, that’s significantly decreased. But the bottom line is that they’re still getting the offers. People are still buying those houses.”
Many buyers who could technically purchase now will probably hold off on making their move until rates start to tick lower. But taking the plunge now and refinancing at lower rates down the line could be a better option, according to Shraybman, who has some very specific advice for those clients.
He envisages two potential scenarios for clients who wait until rates go down before they buy: “A, you might keep on getting outbid on that house, so you might not even be able to get the house,” he said. “Or B, if you do end up being able to get that house, you’re going to be paying a lot more money than you would today.
“If the recent drop in longer-term rates is sustained, then we expect to see another uptick in refinance applications and subsequent refinance mortgage volumes this week,” said Fannie Mae chief economist Doug Duncan.
— Mortgage Professional America Magazine (@MPAMagazineUS) August 7, 2024
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“And the benefit of saving on the rate is going to be insignificant compared to the equity that you would end up losing.”
That consideration is especially relevant for first-time buyers who are capable of making their move now, he said – because while existing homeowners are probably seeing the value of their property appreciate even as they consider a move, prospective new buyers are faced with the possibility of not being able to buy when the market heats up and potentially having to continue renting.
What environment are homebuyers currently facing?
Bidding wars were a common occurrence across many US housing markets during the COVID-19 pandemic as record-low borrowing costs and pent-up savings saw scores of buyers ramp up their purchasing plans.
That competition has eased substantially as rates jumped since the beginning of 2022, although Shraybman questioned how long the current milder climate would last in the event of a downward trend in rates.
A positive atmosphere for buyers is prevailing for now, he said. “It’s definitely much quieter than it was about a year, year and a half ago. So it’s now a lot easier for the buyers to actually be able to go under contract,” he said. “[Previously], I would be sending out multiple preapprovals on multiple properties because the buyers were submitting those and constantly getting overbid.
“Now, I see that a lot more preapprovals are getting accepted… I’m seeing a number of seller concessions as well, definitely a lot more than I have in the past year and a half.”
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