Consumers get more home buying power as Fed cuts interest rates

The U.S. Federal Reserve this week slashed interest rates for the first time since the Great Recession in 2008, but experts say the move is unlikely to improve what is already a very favorable borrowing environment for home buyers.

The federal funds rate, which governs the rate banks charge each other for short-term borrowing, will now fluctuate around the 2% to 2.25% market, the New York Times reported.

The Federal Reserve said it had decided to lower interest rates in order to avert the threat of an economic downturn. It did so following months of pressure from U.S. President Donald Trump to do just that, though it didn’t say whether or not this actually impacted its decision.

But the rate cut is unlikely to mean the majority of home buyers will benefit from additional mortgage savings. Lawrence Yun, chief economist of the National Association of Realtors, said that as interest rates for a 30-year home loan already hover below 4%, the move may actually provide more benefit to borrowers who use non-traditional types of financing.

“Many borrowers will benefit, especially those with adjustable-rate mortgages and commercial real estate loans,” Yun said. “The longer-term 30-year fixed-rate mortgages will see little change in the near future because they had already declined in anticipation of this latest move by the Fed.”

However, Yun said the lower rates may help with housing affordability in the short-term, as both home prices and rents have consistently outperformed incoming growth in recent years.

“The only way to mitigate housing-cost challenges as a long-term solution is to bring more supply of both multifamily and single-family homes to the market,” the economist added.

At least, the lower cost of borrowing should help buyers to manage rising home prices better, said Danielle Hale, chief economist at realtor.com.

She explained that buyers who spend $1,500 per month on their mortgage can now afford to buy a home worth $402,500 this year, compared to just $367,500 last year, when mortgage rates hovered around 4.57%.

“Last year, buyers would have needed an additional $145 a month on top of the $1,500 to afford a $402,500 home,” Hale said.

In some places, home buyer’s money may stretch even further, Hale said. “An extra $35,000 in purchasing power, depending on where you are in the country, can really make a difference to buyers today. It still counts, even with home prices up 6% nationally. That increase in purchase power is greater than the national price increase,” she added.