For the first time in four years, the Federal Reserve has cut its federal fund rates – with a bigger-than-predicted drop.
The benchmark interest rate now sits in the range of 4.75% to 5%, half a percentage point lower than it was before the announcement. Analysts now believe that rates could continue to fall, with another half-percentage point drop expected by the end of 2024.
While this should lower interest rates on a range of borrowing costs, including mortgages, it might take a while for the housing market to reflect this. As a property investor, here’s what you need to know about the federal reserve rate drop right now.
First things first: what is the Fed fund rate, and why is the rate change important?
The Federal Reserve (or “Fed” for short) is the central bank of the USA and regulates the country’s monetary and financial system. The federal funds rate is the target interest rate that commercial banks borrow and lend money to each other. It’s set by the Fed’s policymaking body, the Federal Open Market Committee (FOMC).
Rate decisions are made eight times per year, and are influenced by what’s happening in the rest of the economy. The whole point is keeping consumer prices stable, and lowering the unemployment rate. Until the most recent rate cut, the Fed had kept its key interest rate at 2.25 to 5.50 percent for more than a year.
As well as affecting short-term rates on financial products like credit cards, auto loans, and mortgages, rates can also impact the stock market.
Will banks lower interest rates after the Federal Reserve rate cut?
For borrowers relying on mortgages, it’s unlikely that your monthly payment will change right now. Many economists believe the market may have already priced in the Fed’s September rate cut, so mortgage rates should remain stable for a while.
This is backed up by data from this summer, which shows that mortgage rates already fell by more than the half-percentage point of the Fed rate cut.
Data from Bankrate‘s national survey of lenders showed the average rate on a 30-year loan was 7.09 percent in July. By 11 September, the rate had dropped to 6.31 percent — at least a week before the Fed changed its benchmark rate on September 18.
Experts agree that mortgage rates are unlikely to change in the wake of the announcement. “The immediate impact of the cut is not mortgage-rate friendly, as bond yields have jumped higher,” Melissa Cohn, regional vice president for William Raveis Mortgage, said in a statement.
She continued “Mortgage rates are data-dependent. They will drop if we continue to get weaker data. I do expect rates to fall through the end of the year, but not as much as people would like.”
Is half a percent likely to make a big difference?
While the half-percentage point was a much bigger drop than many analysts predicted, it’s worth remembering that federal fund rates are still high compared to a few years ago. As recently as the first quarter of 2022, the Fed was holding the rate around zero.
In its effort to fight inflation, the Fed had a series of rate hikes from March 2022 to July 2023. This saw rates increase from 0.25 to 0.50 percent up to 5.25 to 5.50 percent. While the lower benchmark rate is likely to be a relief for many, rates for borrowers are still higher now than two years ago.
However, it’s likely that the funds rate will continue to reduce. In a recent Q&A, Austan Goolsbee (Federal Reserve Bank of Chicago President) has claimed it’s likely there will be “many more rate cuts over the next year.” He expanded that “Over the next 12 months, we have a long way to come down to get the interest rate to something like neutral to try to hold the conditions where they are.”
What does this mean for property investors?
September’s federal rate cut is just the beginning. It will have an impact on different areas of the economy (not least the job market, savings accounts, and the average credit card rate) but for property investors the new fund rate comes with a unique set of opportunities and challenges.
1. You could refinance for a better deal
Mortgage rates started to fall in preparation for this rate cut, and there’s a good chance they’ll fall even further in preparation for more rate cuts this year. If you’re currently making huge monthly payments on a mortgage or personal loan, it’s prime time to refinance at a lower rate.
Similarly, if you were considering a private loan but were put off by high rates, now is a good time to shop around for a better deal. We offer a comprehensive suite of loan programs for a wide range of property developments including fix and flip, ground up construction and DSCR loans.
2. Lower mortgage rates could increase profit margins
As mortgages become cheaper, more people will be tempted back to the housing market. For property investors this means more buyer demand and faster sales.
There’s also the benefit of high property values resulting in higher profit margins, and asset appreciation for properties you’re holding. Our fix and hold real estate strategies to help take advantage of this opportunity.
Low rates often stimulate demand for larger, more expensive properties as people upgrade their living conditions. This creates opportunities for anyone specialising in luxury real estate. Our tips on how to increase the value of your fix and flip property should help you appeal to this market.
3. Lower interest rates could make development cheaper
As ground-up construction loans get less expensive, developers will be able to get more projects off the ground. And, as lower mortgage rates broaden demand, developers can expand into untapped and underserved markets.
Low rates often attract investors looking for opportunities in real estate, due to the profit opportunities we mentioned before. This makes it easier to raise funds and secure partnerships.
By launching your project in a particularly hot market, it’s likely to mean even more profits: we’ve listed some of the top markets to consider for a construction project.
4. Commercial real estate could see a boost
Lower federal rates tend to be good for the job market. As businesses grow, there will be more demand for commercial spaces like shops and industrial buildings. Demand for office space is likely to grow, too, especially if more companies follow Amazon’s return to office mandate.
If this is a space you’re not familiar with, read about the pros and cons of investing in commercial real estate.
Capitalizing on Current Market Opportunities with Express Captial Financing
The recent decision by the Federal Reserve to cut federal fund rates presents a momentous opportunity for property investors. With the possibility of further rate decreases on the horizon, as suggested by Federal Reserve Bank of Chicago President Austan Goolsbee, the current financial landscape is poised to unlock an array of potential benefits for savvy investors. From refinancing existing mortgages to embarking on new real estate ventures, the timing couldn’t be more advantageous.
Understanding the full scope of opportunities these changes present requires not just vision, but a trusted partner to help navigate this evolving landscape. To explore how these rate changes can be transformed into a strategic advantage for your portfolio, reach out to Express Capital Financing. Our team is ready to listen to your needs, analyze your goals, and guide you through a selection of loan options tailored to your unique investment scenario. Whether you’re looking to refinance, expand your portfolio, or venture into new projects, now is the moment to harness the potential of a lower-rate environment.
