Interest Rate Cut on the 2024 Housing Market

In a move that sent ripples through financial markets, on December 13th, 2023 the United States Federal Reserve announced there will be three gradual cuts of interest rates in 2024. This decision is poised to have far-reaching effects on various sectors of the economy, with the housing market standing out as a key player in the unfolding narrative. 

Interest Rates and Mortgage Affordability 

The foremost impact of a Federal Reserve interest rate cut will be felt in the realm of mortgage affordability. As of January 12th, 2024, the federal funds rate sits around 5.25-5.50%. With banks marketing up that rate by 1.00-3.00%, the customer has seen interest rates in the 7% and 8% range. At this rate, consumers have found it unappealing to borrow money. However, lower interest rates typically translate to reduced borrowing costs for homebuyers. As interest rates decrease, the cost of financing a mortgage diminishes, making homeownership more accessible to a broader swath of the population. For prospective homebuyers, this presents a unique opportunity to secure mortgages at lower rates than what existed in 2023. Lower interest rates can lead to lower monthly mortgage payments, making homeownership a more viable option for first-time buyers and those looking to upgrade their residences. 

Stimulating Demand in the Housing Market 

The Federal Reserve's decision to lower interest rates is often seen as a strategy to stimulate economic activity. In the housing market, this manifests as increased demand for homes. Lower financing costs incentivize potential buyers to enter the market, which, in turn, can lead to a surge in home sales. However, the impact on demand is not uniform across all segments of the housing market. While entry-level homes may experience a more pronounced uptick in demand due to improved affordability, higher-end properties may also benefit as investors and move-up buyers take advantage of favorable financing conditions. Typically, the higher you go on the housing price scale, the less demand there is. A greater affordability could result in people feeling more comfortable purchasing a higher priced home.

Home Prices and Market Dynamics

 As demand for homes intensifies, the natural consequence is an upward pressure on home prices. The dynamics of supply and demand come into play, and in a scenario where demand outpaces supply, sellers are empowered to command higher prices for their properties. The past 3 years, we’ve experienced a historically low housing supply available on the market. As a result, home seller’s have reaped the benefits of bidding wars and over-asking price offers. Long story short, that trend could continue in 2024. Consequently, 2024’s low supply and higher demand (affordability with lower interest rates) might lead to a period of appreciation in home values; a trend that will be welcomed by existing homeowners but could pose challenges for first-time buyers. For those already in the housing market, the potential appreciation of their properties can represent an opportunity to build wealth through real estate. On the flip side, it could further exacerbate affordability concerns for those yet to make their first foray into homeownership. I believe 2024 will be a great year to either buy or sell a home. We will see home mortgage payments decrease but we could also see an equivalent or greater increase in home prices. The United States Federal Reserve will have to monitor the housing supply as they proceed with their interest rate cuts to ensure their actions do not have unintended side effects towards housing affordability. 


Other Considerations for Homeowners and Investors 

While a lowered interest rate environment may seem like an unmitigated positive for the housing market, it's crucial to consider the broader economic context. Factors such as employment rates, inflation, and overall economic stability play a role in shaping the sustainability of any housing market boom. Homeowners looking to capitalize on a potential rise in property values should remain vigilant about market conditions and make informed decisions based on their financial goals. Not all areas of the country will experience the ensuing demand increase as other, more desirable locations will. Investors, too, must carefully assess risk and reward, understanding that real estate markets can be dynamic and subject to various external factors. Buying an investment property in the early parts of the year might bring about a better opportunity to capture a year's worth of potential appreciation. 

In conclusion, the Federal Reserve's decision to lower interest rates in 2024 has set the stage for a dynamic period in the U.S. housing market. While enhanced mortgage affordability may empower more individuals to realize their homeownership dreams, the resulting increase in demand could have cascading effects on home prices and market dynamics. I would not be surprised if we see housing prices increase as homeowner’s experience a larger demand for their homes. Lets just hope that the affordability with lowered interest rates outweigh the uptick in prices. As with any economic shift, staying informed and adapting strategies to evolving conditions will be key for individuals navigating the intricate landscape of the real estate market in the coming months. Let 2024 be a year of growth and change for you. But remember to do so wisely and don’t overpay for a house you wouldn’t otherwise be able to afford. 

I am always here to answer any questions or provide advice. Please feel free to reach out.

Thank you for reading! 

Nick Scherba

REALTOR - American Associates Realtors