The Fed Is Planning to Cut Rates Soon. Here’s How Investors Should Prepare

Key Takeaways:

• Interest rate cuts are expected to begin in September, likely starting with a 0.25 percentage point reduction, potentially revitalizing the housing market.
• Lower rates are predicted to bring sellers back into the market, ease prices, especially in the Sunbelt, and increase housing supply, although inventory remains tight in the Northeast and Midwest.
• Lower rates in 2024 will likely spur refinancing activities and loan originations, with increased home values leading to potential cash-out refinances. Investors should prepare by improving credit, considering fix-and-flips, buying rentals, and planning renovations.

Interest rate cuts are finally on the horizon, with predictions pointing to September. Fannie Mae and Federal Reserve Chairman Jerome Powell indicate a potential cut as early as the next FOMC meeting.

“If we were to see, for example, inflation moving down quickly — or more or less in line with expectations — growth remains reasonably strong, and the labor market remains consistent with its current condition, then I would think that a rate cut could be on the table at the September meeting,” Powell stated.

The Reemergence of an Investor-Friendly Housing Market

This week’s Fed meeting did not produce an August rate cut but increased speculation for September. The anticipated 0.25 percentage point cut should signal the re-emergence of the housing market, trimming the benchmark rate to 5% from 5.25%. Further cuts could follow in December, setting the stage for 2025 to be a year of more reductions, renewing buying and selling activities.

“At the moment, a modest cut of 25 basis points in September seems likely. If that goes well, we could even see two additional 25 basis point cuts before 2024 comes to an end,” said Jacob Channel, chief economist at LendingTree, in an email to CBS News. “Cuts are far from guaranteed, however. Remember, the Fed is designed to pivot quickly should something unexpected happen.”

While the Federal Reserve doesn’t directly control the interest rates your bank charges, it influences them by setting the federal funds rate, which determines how much banks charge each other when lending or borrowing excess reserves overnight. Banks then adjust the rates they charge for credit cards, mortgages, personal loans, and other financial products.

Lower Rates Will Bring Sellers Off the Sidelines

Despite better-than-expected home price growth in Q2, Fannie Mae economists predict a moderate slowdown in 2024 and 2025, with annualized growth rates of 6.1% and 3%, respectively. Increased supply, especially in the Sunbelt, will ease prices, though inventory remains tight in the Northeast and Midwest. Lowering rates would encourage more sellers to enter the market and make it more affordable for developers to build new homes.

“We expect these varied market conditions to lead to a slight decline in total new home sales nationally for the full year 2024, but a slight increase in existing home sales,” said Doug Duncan, Fannie Mae senior vice president and chief economist, in its ESR report.

Fannie Mae’s ESR Group sees no reason to modify its expected 2024 sales figures of 4.81 million from the previous month. Higher numbers are widely expected in 2025 as rates begin to fall, with rates projected at 6.8% in late 2024, dropping to 6.4% in 2025.

Expect a Refinancing Frenzy

Rate cuts in 2024 will likely boost loan originations—up by $14 billion from June’s forecast—with closings expected in 2025. Homeowners and investors have postponed refinancing, anticipating lower rates in 2025. Fannie Mae forecasts refi volumes to grow to $563 billion. With rising home values, many owners may consider cash-out refinances.

The Jobs Market Is Key

While rampant inflation drove last year’s interest rate hike, lowering rates relies on balancing inflation reduction with stable job growth. A significant hiring slowdown could jeopardize economic stability. The Fed has emphasized lowering inflation but now highlights its dual mandate of maintaining stable prices and low unemployment, adding more weight to job market performance in future rate decisions.

What a Rate Cut Means for Homebuyers

Lower borrowing costs will benefit all real estate sectors. For investors, this means reduced mortgage payments and increased cash flow. “A decline of 0.44 percentage points may not seem like a big deal, but in mortgage terms, it can save about $100 a month for buyers of a $350,000 home,” LendingTree’s Jacob Channel noted.

Moves Investors Should Make in Expectation of an Interest Rate Drop

1. Improve Your Credit: To take advantage of lower interest rates, ensure your credit is in top shape. Check your credit report for free without impacting your score. Work on improving your credit score, as even a slight increase can enhance your buying power.

2. Lock in Fix-and-Flips Now: A fix-and-flip can take six months or more. Buying a fixer-upper now means you can list it when rates have dropped considerably. The market is still tight, but buying wisely can yield rewards once rates fall.

3. Buy Rentals: Purchase rentals now to beat the rush. Once rates drop, you can always refinance to take advantage of lower rates.

4. Consider Waiting to Refinance: If you have significant equity, you might be considering a cash-out refinance. However, waiting for rates to drop in 2025 could save you money. Balance this against the opportunity cost of not investing sooner.

5. Start Renovations on Your Primary Residence: If you own your home and have equity, begin renovations now to prepare for a refinance when rates drop. Simple upgrades like painting, decluttering, and updating fixtures can increase your home’s value and improve your living space.

Final Thoughts

When interest rates were last low, bidding wars and low inventory made buying a home challenging. Waiting for rates to hit rock bottom isn’t advisable. Instead, start your next investment project now and refinance later. With rate cuts expected in September and possibly more to follow, buying in 2024 will allow you to benefit in 2025 without worrying about this year’s tax bill.