What Homebuyers Need to Know About the Federal Reserve’s Rate Pause

As the Federal Reserve decided in June to maintain its interest rate pause, the real estate market has entered a period of relative stability. While this decision signals that the market has cooled, it doesn’t necessarily mean that rates will drop anytime soon. However, it does offer some stability for mortgage rates, at least for the near future, according to Thomas Eller, vice president and senior mortgage loan officer at Raleigh’s North State Bank.

The Impact of the Federal Reserve’s Decision

“Starting the last half of last year, we got some good inflation data,” Eller explained. “The markets were convinced going into 2024 that we were going to see rate cuts in the spring to middle part of 2024. Of course, what happened is inflation numbers went right back up again. The market started pricing back in rate hikes.”

Despite these fluctuations, Eller noted that recent data shows the market responded positively to the Fed’s decision to pause rates, indicating that inflation is beginning to slow once again. This cautious optimism has led to a more measured approach from the Fed, with no immediate plans to either raise or lower rates.

As a result, mortgage rates will likely be evaluated on a month-to-month basis over the summer, depending on the Fed’s outlooks. However, Eller anticipates that reduced inflation over the summer could pave the way for a rate cut later in the year.

“You’re probably going to see a lot of pressure on the Fed to put more certainty behind a rate cut, which could happen in September,” Eller predicted. “If we don’t get that, we think we’ll get one in the November cycle. Rates are going to be cut this year unless something drastic happens with the next July inflation report. We’ve been saying every month, ‘Well, we’re going to have to wait and see what happens next month.’”

What This Means for Homebuyers

For potential homebuyers, the current environment presents a unique challenge. While waiting for rates to decrease might seem like a good strategy, Eller warns that it could exacerbate issues in the Triangle market, where demand for homes remains high, but inventory is low.

“The longer you wait, the more you will fight pent-up demand,” Eller said. “We went through this cycle with a gridlocked real estate market, meaning if rates would have kept staying low, we wouldn’t have had enough inventory. We were just digging ourselves into a hole.”

Eller also highlighted the “golden handcuffs” phenomenon, where many homeowners who secured low mortgage rates during the COVID-19 pandemic are reluctant to sell and move, further tightening the market.

“Those people haven’t gone anywhere,” he said. “What’s happened is you’ve built up a lot of current homeowner resales that also want to move because they’ve spent the past four years doing nothing except looking at improving their lifestyle. The longer you wait to purchase, the tougher it is to buy because you’ve got two headwinds: one, pent-up demand, and two, greater affordability with lower rates.”

Opportunities for First-Time Homebuyers

Eller also pointed out that first-time homebuyers have more opportunities now, thanks to enhanced products and incentives. “Pretty much all of the down payment assistance providers have either recommitted or increased their subsidies. So that’s good,” he said.

However, he emphasized the importance of acting sooner rather than later. “Customers that are on the fence about buying right now — the longer they wait, the more they’re going to fight the demand that we left on the table, which was exorbitant in 2022,” Eller said.

Optimism on the Horizon

Despite the challenges, Eller remains optimistic about the future of mortgage rates and the real estate market. “It’s all positive news as far as what’s on the horizon, what’s going on in our world,” he said. “Basically, the Fed has said, ‘Guys, we’re very close. We just want to know we’re heading in the right direction,’ and July’s inflation numbers will dictate how they react.”

The Importance of Local Expertise

As the market continues to evolve, Eller advises buyers to work with trusted, local experts to navigate the complexities of the Triangle real estate market. “In any market, it doesn’t matter if it’s up or down, tight, soft,” he said. “Align yourself with a local person on the ground. It’s of the utmost importance. It’s as important as the real estate agent that you choose. If you’re working with a real estate agent, ask them for recommendations for the local market. Just because you used somebody eight years ago, it is not necessarily the person that you have to use again. It’s good to find local recommendations.”

With the right guidance and a clear understanding of the market dynamics, potential buyers can make informed decisions that position them for success in the coming months. As mortgage rates remain stable and the possibility of future rate cuts looms, now may be the time to take advantage of the opportunities in the Triangle’s real estate market.