When rates decrease Opportunity Increases
Get Ready: Interest Rate Cuts Are Coming and Here's How They’ll Impact Home Sales and Real Estate Investments
It's been a long time coming, but it looks like interest rate cuts are finally on the horizon, starting this September. Fannie Mae, a major player in the mortgage market, and Federal Reserve Chairman Jerome Powell both hint at this, indicating that the federal funds rate could play a pivotal role. Powell recently mentioned that if inflation drops as expected and the job market stays strong, we might see a rate cut soon.
Boost for the Housing Market
A rate cut could breathe new life into the sluggish housing market. Here’s what we can expect as the Federal Open Market Committee gets closer to the point of cutting rates.
Investor-Friendly Housing Market
While the Fed didn’t cut rates this August, there’s strong speculation for a September cut, potentially lowering the benchmark rate to 5% from 5.25%. If things go well, we might see more cuts in December, setting the stage for a vibrant 2025 housing market. Lower rates could make buying and selling homes much more attractive.
Jacob Channel, chief economist at LendingTree, mentioned that a modest cut in September is likely, and if all goes well, we might see more cuts before the year ends as Jerome Powell speaks in upcoming FOMC meetings. Although these cuts aren't guaranteed, the potential is exciting for anyone in the housing market.
More Sellers in the Market
Even though home prices grew better than expected in Q2, Fannie Mae predicts a slowdown in 2024 and 2025, with growth rates of 6.1% and 3%, respectively. More homes, especially in the Sunbelt, will help ease prices, and this effect could be amplified if the Fed cuts the policy rate, said the federal reserve chair jerome powell. However, inventory is still tight in parts of the Northeast and Midwest, despite efforts by the central bank to keep rates steady. Lower rates could encourage more sellers to list their homes, creating more opportunities for buyers and making it more affordable for developers to build new houses.
Doug Duncan, Fannie Mae’s senior VP and chief economist, expects a slight decline in new home sales nationally in 2024 but a slight increase in existing home sales. Lower rates will likely drive these numbers up in 2025.
Refinancing Boom: This may gain momentum if the unemployment rate remains low.
Lower rates in 2024 will likely boost loan originations, with many homeowners and investors holding off on refinancing until 2025 for even better rates. Fannie Mae forecasts a significant increase in refinancing volumes, thanks to rising home values and the potential for cash-out refinances.
Stable Job Market is Key
The Fed's previous rate hikes aimed to curb inflation but also slowed the housing market. Future rate cuts will need a careful balance between lowering inflation and maintaining job growth. A strong job market is crucial for economic stability and will influence future rate decisions.
**What Lower Rates Mean for Homebuyers**
Lower borrowing costs will benefit all areas of real estate. For investors, lower mortgage payments mean increased cash flow. Even a small drop in rates can save buyers significant amounts on their monthly payments.
**Arizona & Southern California Benefits**
The Sunbelt region, which includes states like Florida, Texas, Southern California and Arizona, has been experiencing a boom in population growth and housing demand. Here’s how lower interest rates could further benefit this region:
1. **Increased Affordability**: Lower interest rates make mortgages more affordable, attracting more buyers to the Sunbelt. This trend is expected to continue as long as the Fed cuts interest rates. This region already offers lower living costs compared to the Northeast and West Coast, making it even more appealing as mortgage payments decrease.
2. **Higher Inventory**: Lower rates will likely encourage more sellers to enter the market, increasing the housing supply. This is crucial for the Arizona and Southern California, where demand recently has outstriped supply.
3. **Economic Growth**: Arizona and Southern California is home to many rapidly growing metropolitan areas, and with the labor market strengthening, economic prospects look even brighter. Lower mortgage rates can boost local economies by increasing homeownership rates, leading to more spending in other sectors like retail and services.
4. **Investment Opportunities**: With lower rates, investors might find Phoenix, Scottsdale and San Diego even more attractive for purchasing rental properties and fix-and-flip projects, particularly if the central bank cuts interest rates. The region's growth potential and lower entry costs make it a hotspot for real estate investment.
Sources:
- Fannie Mae's Economic and Strategic Research Group reports and forecasts.
- Comments from Jacob Channel, chief economist at LendingTree, as reported by CBS News.
- Federal Reserve Chairman Jerome Powell's statements from recent FOMC meetings.
Benefits of Hard Money Loans
In addition to traditional financing, hard money loans can be a valuable tool for investors, especially in a market with fluctuating interest rates. Here’s why:
1. **Quick Closing**: Hard money loans are known for their quick closing times. This can be a game-changer in a competitive market where timing is crucial, especially with the labor market being a significant factor. Investors can secure properties quickly without the lengthy approval processes associated with conventional loans.
2. **Flexibility**: Hard money lenders often offer more flexible terms than traditional banks. This flexibility can be crucial for investors needing customized financing solutions for unique projects.
3. **Refinancing Opportunities**: As interest rates drop, the ability to refinance hard money loans into lower-rate conventional mortgages becomes highly attractive. This means investors can take advantage of the initial quick and flexible financing, then shift to lower rates, reducing their overall cost and increasing profitability.
Smart Moves for Investors
With rates expected to drop later this year and next, here’s how you can make the most of it:
1. **Boost Your Credit**: Good credit is crucial to benefit from lower rates. Check your credit report and start improving your score now.
2. **Lock in Fix-and-Flips**: Start your fix-and-flip projects now so they’re ready to sell when rates are lower.
3. **Buy Rentals**: Purchase rental properties now to beat the rush and refinance later when rates drop.
4. **Wait to Refinance**: If you have significant equity, consider holding off on refinancing until rates drop further.
5. **Renovate Your Home**: Start renovating your home now to increase its value and refinance later at a lower rate.
Final Thoughts
When rates were last low, it was tough to buy a home due to competition and low inventory. Waiting for rates to hit rock bottom isn't the best strategy. Instead, start your next investment project now and refinance later. With a rate cut expected in September and more potentially coming, buying in 2024 could set you up nicely for 2025, especially if the fed chair, Jerome Powell, decides to reduce our policy rate further.
For all your financing needs, from refinances to creative solutions, reach out to Logan Sullivan. Logan has the knowledge and leverage to assist in all transactions, keeping a close watch on the federal funds rate to provide the best advice. Whether you’re looking to take advantage of lower rates, secure quick closing hard money loans, or explore flexible financing options, Logan is your go-to expert. Contact Logan Sullivan today and get the support you need to navigate the evolving real estate market.
Sources:
- [Fannie Mae Economic and Strategic Research Group](https://www.fanniemae.com/research-and-insights/forecast)
- [CBS News on Federal Reserve and Interest Rate Speculation](https://www.cbsnews.com)
- [Federal Reserve Official Statements](https://www.federalreserve.gov/newsevents/pressreleases.htm)