Should you wait for lower mortgage rates to buy a home?

As the Federal Reserve’s September 17-18 meeting approaches, real estate investors are anticipating a potential interest rate reduction. Speculation surrounds whether the Fed will reduce the federal funds rate by 25 or even 50 basis points. For international investors, especially those holding off on purchases, the question remains: should they wait for the rate cut, or act now?

In this article, we’ll explore what the upcoming Federal Reserve meeting is set to address, how the Fed impacts but doesn’t directly control mortgage rates, and why waiting for lower rates may not result in the savings investors expect. We’ll also break down the numbers to show how rising home prices can diminish the benefits of lower rates.

What to Expect from the September Fed Meeting

The Federal Reserve is expected to announce a reduction in the federal funds rate, currently set between 5.25% and 5.50%. The Fed’s role in adjusting interest rates is aimed at managing inflation and stabilizing the economy. However, it’s crucial to understand that the Fed doesn’t directly set mortgage rates. Instead, the federal funds rate influences short-term lending rates, while mortgage rates generally follow the trends of 10-year Treasury yields, which are shaped by investor sentiment and economic conditions.

While many hope a rate cut will bring mortgage rates down, lenders may have already priced in expectations of this reduction. So, the anticipated rate drop may not result in significant changes in mortgage offers after the Fed meeting.

How Lower Rates Impact Home Prices

Lower interest rates typically make borrowing more affordable, which attracts more buyers to the real estate market. This surge in demand can drive up home prices, especially as inventory becomes limited. Consider this updated example based on the median U.S. home price of $360,000:

• For a $360,000 home at an 8% interest rate, your monthly payment would be approximately $2,641.55.
• If rates drop to 7.5%, the monthly payment would lower to $2,517.17, resulting in a savings of $124.38 per month.
• However, if the median home price increases by 3.3% (to $371,880), the monthly payment at the lower rate would rise to $2,600.24, reducing the savings to just $41.31 per month.

Even with a rate reduction, rising home prices can quickly offset any potential monthly savings. Additionally, this example does not account for the upward pressure on prices that often follows a rate cut, as more buyers enter the market, creating competition and further driving up prices. An increased premium can be expected in key cities such as Tampa and Miami, FL, Dallas, TX, and Phoenix, AZ.

Federal Reserve Rates and International Investors

It’s important to note that the 5.25% - 5.50% rates discussed concerning the Federal Reserve refer to the federal funds rate—the rate at which banks lend to one another overnight. While this rate influences mortgage interest rates, it does not directly set them. Mortgage rates are primarily influenced by broader economic factors, particularly the 10-year Treasury yield.

As of the most recent data from Optimal Blue, the current average interest rate for a fixed-rate, 30-year conforming mortgage loan in the U.S. is approximately 6.257%. However, for international buyers, particularly those investing in U.S. properties, mortgage rates tend to be 50 to 90 basis points higher, translating to an additional 0.5% to 0.9%. For instance, an international buyer might expect rates between 6.757% and 7.157%, but their specific financial situation will ultimately determine these.

Several factors will also influence the exact rate that a borrower receives, including:

• Creditworthiness: International investors often face unique credit assessment criteria.
• Loan structure: Terms, down payment size, and property type can influence the rate.
• Market conditions: Lenders may adjust rates based on overall demand and financial risk.

This means that while general rate ranges provide an estimate, the final mortgage rate is tailored to the borrower’s individual profile, not just market conditions.

Why Waiting May Not Be the Best Option

While waiting for a lower interest rate may seem like a smart strategy, several key factors suggest that acting now could be more beneficial for real estate investors:

• Price Increases: As shown in the example above, even if mortgage rates drop by 0.5%, a 3.3% increase in the median home price can drastically reduce the monthly savings from a lower rate. In the example of a $360,000 home, the price increase alone can cut monthly savings down to just $41.31.
• Increased Competition: If rates do fall, more buyers are likely to enter the market, leading to increased competition for available properties. This can drive up prices further, making it more difficult to secure a favorable deal.
• Risk Premium for International Buyers: As previously mentioned, international buyers should also keep in mind that they will typically face higher interest rates due to the additional risk premium. Even if rates drop for U.S. citizens, international rates may not decline as significantly.

Conclusion: Act Now or Wait?

For international investors, the prospect of lower interest rates is tempting, but waiting for the Federal Reserve’s announcement may not lead to the expected savings. Rising home prices, increased competition, and the additional risk premium for foreign investors all point to the possibility that waiting could be more costly than anticipated.

Each buyer’s situation is unique, but the data suggest that securing a property now, rather than holding out for a marginally lower rate may be the more financially sound decision. Acting sooner rather than later could help investors avoid paying more due to rising prices and heightened competition.

Ultimately, it’s critical to carefully calculate the potential savings from lower rates against the potential increase in home prices to determine the best course of action.

The opinions expressed in the Blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product.