7 months ago
72
Ethan Roberts
Wed, Sep 18, 2024, 5:55 AM 4 min read
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Over the past few weeks, speculation has grown about whether the FED will cut interest rates and by how much. At first, Wall Street speculated on a quarter-point rate cut, but the CME Group's Fed Watch now says the market is pricing in a 63% possibility of a 50 basis point rate cut.
Many popular media outlets have created the notion that any interest rate cuts will make homebuying more affordable. But this may be a fallacious argument.
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Consider the following:
· Mortgage rates are based on the 10-year Treasury yield, which has already moved lower in anticipation of a Fed interest rate cut. It's possible that mortgage rates could hold steady or even move up, depending on what the Fed does.
· Many prospective buyers have been sitting on the sidelines, awaiting the Fed's move before bidding on a house. Any increase in demand will make home prices rise.
· Lower mortgage rates make loan payments cheaper, but rising or falling home prices affect monthly payments more than interest rates.
The following chart shows the amount of money needed for down payments and the monthly payments on a 30-year fixed loan (principal and interest, or P&I) on three different home prices with three different interest rates:
| HOME PRICE | 15% DOWN PYMT * | LOAN AMOUNT | MONTHLY P&I @ 6.5% | P&I @ 6.25% | P&I @ 6.0% |
| $400,000 | $60,000 | $340,000 | $2,149 | $2,094 | $2,038 |
| $450,000 | $67,500 | $382,500 | $2,418 | $2,355 | $2,293 |
| $500,000 | $75,000 | $425,000 | $2,686 | $2,617 | $2,548 |
* The median down payment on a home ranges from $5,800 to $98,700 and varies by state, but the national average is 15.0%.
Notice that the savings from a decline in interest rates are completely offset as the home price rises. According to the Federal Reserve, the second-quarter median home sales price in the U.S. was $412,300, a decrease of $6,200 year over year and well below the peak price of $442,600 in the fourth quarter of 2022.
