Should I buy a house if the Fed cuts rates?

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• Mortgage rates have been trending down in anticipation of a rate cut at the Fed's September meeting.
• The Fed is expected to cut rates multiple times this year and in 2025, which means mortgage rates should continue decreasing.
• It could be worth waiting for mortgage rates to drop further before starting the homebuying process.

Wondering how the latest Federal Reserve meeting could impact affordability for homebuyers? Mortgage rates are likely to go down as the Fed lowers the federal funds rate. But whether they'll drop further soon depends on the commentary coming out of this upcoming meeting and the size of the Fed's cut.

September Fed meeting: What homebuyers should know

The Fed is expected to lower the federal funds rate at its meeting on September 17 and 18, with traders pricing in 100% odds of a cut. But it looks like we may only get a 25-basis-point cut, rather than the super-sized 50-basis-point cut that some have been hoping for.

In 2022 and 2023, the Fed aggressively raised its benchmark rate to combat record-high inflation. This caused mortgage rates to reach two-decade highs. But now that inflation has decelerated and the economy is cooling, Fed officials have indicated they're ready to start cutting rates.

Expectations of a Fed cut have helped 30-year mortgage rates fall to 6.20%, according to Freddie Mac, the lowest they've been since early 2023.

August's weaker-than-expected jobs report sparked speculation that the Fed may opt for a larger cut in September to head off a potential economic downturn. But a slight increase in core inflation last month makes a 50-basis-point cut less likely.

After this, the Fed has two meetings left this year, and officials are expected to continue lowering rates at these meetings. This means mortgage rates should continue to trend down through the end of 2024, improving affordability for homebuyers.

Will mortgage rates drop when the Fed cuts rates?

However, buyers shouldn't expect mortgage rates to drop much in response to September's Fed meeting.

"All signs have pointed toward a rate cut of at least 25 basis points at the upcoming September meeting, and as a result, much of the expected decrease in mortgage rates has already been factored into the market," says Dan Burnett, head of investor product at the home equity investment company Hometap .

By the time the Fed actually cuts rates, markets have generally already priced in that cut. This means that mortgage rates tend to move up or down in the weeks ahead of an expected Fed move, rather than right after.

"A more substantial and immediate drop in mortgage rates would likely require an unexpected outcome, such as a larger 50-basis-point cut," Burnett says.

Mortgage rates could fluctuate depending on what Fed Chair Jerome Powell says during his press conference following the meeting. Powell will likely provide some insight into how the Fed is thinking about the economy and how much it could lower rates in the future. If he or other Fed officials indicate that bigger rate cuts could be coming, mortgage rates may inch down.

How Fed rate cuts affect mortgage rates

Changes to the federal funds rate don't directly impact mortgages, but mortgage rates tend to trend up when the Fed raises rates and go down when it lowers rates.

While this leads to a positive impact for consumers looking to take out a mortgage loan, a Fed cut has the opposite effect for savings account and CD rates. In response to a rate cut, high-yield savings accounts and CDs generally offer lower APYs. Consider taking steps to lock in 5% or more on your savings before it's too late .

"Mortgage rates are primarily driven by investor demand in the bond market, which is fluid, and informed by current events," Burnett says. "Investors look to monthly reports on employment and inflation as well as commentary directly from the Federal Reserve to try and glean what the impact to rates will be ahead of time."

Mortgage rates often change depending on the current economic outlook. When the economy is strong, rates tend to be higher. If the economy appears to be cooling off or heading into a recession, mortgage rates typically decrease.

The Fed can impact this outlook by making changes to the federal funds rate, which is why mortgage rates are often influenced by Fed moves .

Should you buy a house now?

In its most recent National Housing Survey , Fannie Mae found that only 17% of consumers think it's a good time to buy a home. Mortgage rates have been steadily dropping for several months now, but interest in buying a home remains relatively low.

"Homeownership is still expensive, but it is getting better," Burnett says. "Lower mortgage rates will help, but that is only half the battle when it comes to housing affordability. There is still a significant mismatch between supply and demand in this market."

The U.S. doesn't have enough homes to meet buyer demand, and high mortgage rates have kept many would-be home sellers on the sidelines, exacerbating the lack of supply. This has pushed home prices up, making it difficult for hopeful buyers to find homes that fit their budgets.

The good news is that mortgage rates should continue to go down in 2024 and 2025. As rates drop, more buyers should be able to find affordability, even as home prices remain elevated.

For example, on a $350,000 mortgage, a 7% interest rate results in a monthly payment of $2,329. But with a rate of 5.5%, that same mortgage costs $1,987 a month.

How to decide if you should buy now or wait

If you're thinking about buying a home, now could be a good time to do so. Mortgage rates are down as the Fed gears up to start cutting its benchmark rate, which means you'll pay less to borrow money compared to those who got a mortgage a year ago.

Next year's peak homebuying season may also be a lot hotter since mortgage rates are expected to continue decreasing. Increased competition can make it more difficult to find a home and drive home prices up at a faster clip. By buying now, you'd avoid all that.

On the other hand, it could be worth waiting for rates to drop further if you're not in a rush to buy a home. The Fed could lower rates substantially by the time we reach the 2025 buying season, which means mortgage rates may be a lot lower, too. Lower mortgage rates can help you save on your mortgage payments , and they can also boost your buying power so you can afford more.

"If the homebuyer has flexibility, they may want to wait as rates are expected to continue to drop throughout next year," says Scott Haymore, head of residential pricing, capital markets, and product development at TD Bank . "However, there is risk that home prices can increase, which may offset some of the rate affordability gains."

Ultimately, it comes down to what makes sense for your situation.

"The best advice we often share with potential homebuyers is that purchasing a home is not about buying in the right market — it's about buying in the right financial situation," says Haymore. "That is the best time to buy a home."