The Federal Reserve made a bold move on Sept. 18, 2024, by cutting the federal funds rate by 50 basis points. Its first rate reduction since March 2020. As predicted, this decision, which dropped the rate to a range of 4.75% to 5.0%, signals the Fed’s shift from aggressive inflation control measures toward a more supportive monetary policy as inflation cools and the labor market softens.
What Does This Mean for the Economy?
The Fed’s rate cut is expected to have several impacts on the broader economy. Mortgage rates, which had already been declining in anticipation of a rate cut, are expected to see further minimal drops. The current average mortgage rate of 6.2% could dip below 6%, boosting consumer purchasing power. For example, homebuyers with a $2,000 monthly mortgage payment budget could see an increase in purchasing power of up to $70,000 compared to earlier this year (Realtor.com).
This should, in theory, make homeownership more accessible to those who were priced out during periods of higher mortgage rates. However, the real estate market is still contending with the supply and demand imbalance that has plagued the industry for years. The lower rates may increase demand, but prices could continue to climb without a corresponding increase in housing inventory, making homeownership elusive for many.
The Fed’s actions also indirectly affect the broader economy by making borrowing cheaper for businesses and consumers alike. Lower interest rates typically encourage investment and spending, stimulating economic growth. However, the Fed’s ability to control mortgage rates directly is limited, as they are also influenced by long-term bond yields, specifically the 10-year Treasury yield.
Implications for Real Estate Appraisers
For real estate appraisers, the Fed’s rate cut is both an opportunity and a challenge. As mortgage rates fall, more buyers may re-enter the market, spurring increased transaction volumes. This uptick in market activity can lead to more appraisal assignments, particularly for purchases and refinances.
However, appraisers should be mindful of the possible “unintended consequences” of this rate cut. As Lawrence Yun, Chief Economist for the National Association of Realtors, noted, the rate cut could stoke demand without addressing the ongoing supply constraints. This could drive home prices higher, exacerbating the affordability crisis and adding pressure on appraisers to navigate an increasingly competitive and volatile housing market.
Additionally, appraisers will need to stay informed on how market conditions evolve, particularly as the Fed continues its monetary policy adjustments well into 2025. With more rate cuts expected, appraisers should anticipate shifts in buyer behavior, mortgage qualification standards, and housing demand (NAR-Instant Reaction).
Appraisers Must Stay Agile
The Fed’s 50 basis point rate cut represents a turning point in the post-pandemic economic landscape. While it may temporarily ease borrowing costs and improve housing affordability, the underlying supply issues remain. Real estate appraisers should prepare for both increased demand for their services and the potential for more complex valuations as housing prices react to changing market conditions. Staying informed and adaptable will be key to navigating this dynamic environment.
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