Published September 6, 2024 by Susan Kadilak

Recent jobs reports, economic indicators, and Jerome Powell’s Jackson Hole speech have already sent interest rates on a downward trend ahead of the next Fed meeting on September 17th. What does that mean for home buyers and sellers in the real estate market? Here’s the breakdown:

 

Lower Interest Rates = Higher Purchasing Power

One of the most immediate and noticeable effects of a drop in interest rates is the increase in purchasing power for homebuyers. This allows buyers to afford more expensive homes or to purchase the same home with a smaller monthly payment. It also tends to draw more buyers into the market, as owning a home becomes more financially feasible for a larger portion of the population.

 

For example, let’s consider a $750,000 home purchase:

  • At a 6.8% interest rate on a 30-year fixed mortgage, the monthly payment for principal and interest would be approximately $4,892.
  • At a 5.8% interest rate, the monthly payment would drop to around $4,405.

That’s a difference of nearly $500 per month! Over the course of a 30-year mortgage, that seemingly small 1% drop in interest rates would save the buyer around $175,000 in interest payments alone.

 

Lower interest rates give buyers more financial flexibility, either allowing them to afford a more expensive home or making homeownership more accessible by lowering monthly costs.

Increased Demand and Competition

As interest rates drop and more people enter the market, the increased demand can lead to more competition among buyers. This heightened competition can drive up home prices, particularly in hot markets where inventory is already limited. Sellers may find themselves in a favorable position, receiving multiple offers and potentially selling their homes for higher than the asking price.

 

However, it's important to note that while lower interest rates can drive up demand, they don’t always lead to higher home prices across the board. The effect on prices depends on various factors, including the local market conditions, the overall economy, and the availability of housing inventory. Lower interest rates may entice homeowners who have been sitting on low interest rates to finally make a move, increasing inventory and balancing out the higher number of buyers in the marketplace.

 

Refinancing Boom

When interest rates drop, it's not just prospective homebuyers who benefit—current homeowners do as well. Lower rates often trigger a refinancing boom, as homeowners rush to refinance their existing mortgages to take advantage of the lower rates. 

Refinancing can also free up additional cash for homeowners, allowing them to pay off other debts, invest in home improvements, or simply save more money each month. 

 

The Wild Card: Presidential Election

 

A presidential election can have a significant impact on the real estate market, as it introduces a level of uncertainty that often causes both buyers and sellers to pause major financial decisions. During an election year, potential changes in economic policy, tax laws, and interest rates are closely watched, as these can directly affect housing affordability and market stability. The anticipation and outcomes of a presidential election can create ripples throughout the real estate sector, affecting everything from buyer demand to long-term investment strategies.