As the Federal Reserve prepares for its mid-September meeting, homeowners, prospective Phoenix homebuyers, and real estate professionals alike are watching closely to see how potential adjustments to interest rates might impact the market.
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Many of these potential owners have been strategically sitting on the sidelines awaiting even a slight drop in rates which would make homes and other large purchases more affordable. In fact, according to the National Association of Realtors (NAR), in 2023 60% of potential homebuyers indicated they were delaying their purchase to see how, or if, rates would drop. As a result, home sales dropped by nearly 30% compared to pre-pandemic levels.
Now with a rate change imminent here’s what Phoenix homebuyers need to know to navigate the shifting real estate landscape.
- Anticipated Rate Adjustment: Experts are widely expecting the Federal Reserve to adjust the Fed rate by approximately 0.25% during their mid-September meeting. While this might sound minor, these adjustments can ripple through various sectors of the economy. Obviously, lower rates can lead to an increase in home sales, but also an increase in home prices. In addition, with lower borrowing costs, some buyers can afford to pay more for homes, which could also drive up prices. Lower interest rates also trigger an increase in consumer spending, especially on big-ticket items like cars and televisions. In addition, lower rates create opportunities for businesses to invest in new projects or equipment.
- Fed Rate vs. Mortgage Rates: A common misconception is that the Fed rate directly dictates mortgage rates. While the two often move in the same direction, they are not directly connected. The Fed rate influences the overall economic environment, but mortgage rates are determined by other factors, including investor demand and economic outlook. The mortgage rate a buyer ends up with also takes into account their credit score and history, type of loan (fixed versus variable), and down payment.
- Potential Impact on Mortgage Rates: Despite the lack of a direct connection between the Fed Funds rate and mortgage rates, many analysts anticipate that mortgage rates will adjust downward as a result of the Fed’s actions. While this trend is expected, it’s important to keep in mind that the shift will likely be gradual rather than dramatic. Just as they went up gradually, any decrease will happen over time.
- Continued Downward Trend: Mortgage rates have been slowly trending downwards for the past 10 months, and any adjustments following the Fed meeting are expected to continue this trajectory. However, the changes likely won’t be substantial as “the market” has already priced in the anticipated fed rate cut, so buyers should manage expectations. If buyers have a greater sense of urgency to purchase a house, they can do so at a higher rate and refinance once/if the rates continue the downward trend.
- Increased Market Activity: Historical data suggests that for every 1% decrease in mortgage rates, about one million buyers nationwide reenter the market. Even modest rate reductions could bring a significant influx of buyers back into play, making competition fierce. That fierce competition can lead to “bidding wars” which we saw before the pandemic. Such a decrease also increases affordability, dropping monthly payments by approximately $200 per month on a $300,000 home.
- Expect Increased Competition and Rising Prices: As rates decrease, expect more buyers to enter the market, creating heightened competition for the already limited number of listings. This surge in demand will likely put upward pressure on home prices. The supply and demand relationship is well documented in the housing market and continues to be a strong player in the price of a home. Because of this, if you have your eye on a house and you don’t want the price to go up, you might want to put in an offer.
- Buyer Tip: Act Sooner Rather Than Later: If you anticipate that rates will continue to decrease, consider beginning your home search now. Waiting could mean facing increased competition and rising prices as more buyers flood the market. Starting the process early can help you secure a home before the competition intensifies.
As we all anxiously anticipate the Fed’s next move, prepared Phoenix homebuyers will be the ones best suited to ride the next wave of activity. Get pre-approved for a loan, start your home search and be ready to negotiate. Lower rates have far-reaching implications throughout the economy and essentially throw a flame on the forest of potential homebuyers ready to make their move. Make yours an informed one.
Author: Trevor H. Halpern, J.D. is CEO of Halpern Residential at eXp. As a Phoenix native, Halpern’s deep knowledge of both people and property has allowed him to create client success in all areas of town. A graduate of ASU’s College of Law, Halpern prides himself on delivering high-level strategy, efficient negotiations and precise tactical execution. Since 2011, Halpern has sold over $300 million in real estate and is in the top 1% of real estate agents in the Greater Phoenix area.
