The Fed plans to cut interest rates soon. Here’s how investors can prepare.

I’ve been waiting for a long time, but I finally saw an interest rate cut. affim Starts in September. Not just a backer of government-sponsored corporate mortgages Fannie Mae is forecasting, but Fed Chairman Powell is Wednesday’s Federal Open Market Committee meeting We expect a rate cut as soon as the next meeting.

“For example, if we see inflation falling quickly – or more or less as expected – growth remains quite strong and the labor market remains consistent with current conditions, then I think a rate cut could be at the September meeting,” he said. Powell explain reporter.

A drop in the federal funds rate could revive the dormant housing market. Here’s how things might change.

Investor-friendly real estate market returns

This week’s Fed meeting did not result in a rate cut in August, but it did increase speculation about September. The first rate cut (expected to be 0.25 percentage points) should mark the beginning of a resurgence in the housing market, lowering the base rate from 5.25% to 5%. If the same scenario happens in December, and the economy performs well (according to the inflation and employment reports), then 2025 could see more cuts and a resurgence in buying and selling.

“Right now, a small 25 basis point cut in September seems likely. If things go well, we could even see two additional 25 basis point cuts by 2024 it’s over“, Jacob Channel, chief economist at LendingTree, said in a report Email CBS News. “However, cuts are far from guaranteed. Remember, the Fed It is designed If an unexpected situation occurs, the direction can be quickly adjusted.

While the Fed doesn’t directly control the interest rates banks charge, it does influence them. Fed setting federal funds rate, This determines How much banks can charge each other to borrow excess reserves overnight. In turn, banks adjust interest rates on credit cards, mortgages, personal loans and other financial products.

Lower interest rates will keep sellers off the sidelines

Although home price growth in the second quarter was better than expected, Fannie Mae economists expect home prices to grow moderately in 2024 and 2025, with annualized growth rates of 6.1% and 3% respectively. the appearance of bigger Supply, especially from the Sunbelt, will ease prices.

However, inventories remain tight across much of the Northeast and Midwest. Lower interest rates will encourage sellers to sell their properties, creating momentum in the market. It would also make it more affordable for developers to build more homes.

“Overall, we expect these varying market conditions to result in a slight decrease in total national new home sales and a slight increase in existing home sales throughout 2024,” said Doug Duncan, Fannie Mae’s senior vice president and chief economist. . ESR report.

Fannie Mae ESR Group sees no reason to revise its forecast sales figure of 4.81 million units in 2024. With interest rates starting to fall, 2025 numbers are widely expected to be even higher. The growth rate is expected to be 6.8% in the second half of 2024 and drop to 6.4% in 2025.

Expected refinancing frenzy

The benefit of rate cuts in 2024 will be an increase in loan originations – $14 billion more than the June forecast – with loans likely to be completed in 2025. refinance Pause in 2024, with lower rates expected in 2025.

As a result, Fannie Mae expects refinancing volumes to grow to $563 billion. Rising home values ​​mean many homeowners are sitting on huge properties fairthey may want to deploy cash out refinance.

The job market is key

While rampant inflation was the main reason for raising interest rates a year ago, which helped put the brakes on the housing market, lowering rates relies on a delicate balance between lowering inflation and keeping job growth steady. A sharp slowdown in hiring would be detrimental to economic stability.

In fact, so far, the Fed has emphasized the importance of lowering interest rates. inflation, But it has now changed its language, saying they are “focused on the risks their dual missions pose to both parties”. The dual mandate is the Fed’s primary goal of maintaining price stability and low unemployment.

This means that the Fed will increase the weight of monetary policy job market performance When making interest rate decisions Move forward Instead of just focusing on inflation.

What interest rate cuts mean for homebuyers

Lower borrowing costs will help all areas of real estate. For investors, this means reducing mortgage payments and increasing cash flow.

“At first glance, a 0.44 percentage point drop may not seem like a big deal. But when it comes to mortgage land, a 44 basis point drop is nothing to scoff at,” noted LendingTree’s Jacob Channel in a CBS News article Buying Value Buyers of a $350,000 home can save about $100 a month on their payments.

What investors should do when they expect interest rates to fall

As a result, interest rates should fall later this year and into next year. How can investors ensure that they “survive to ‘25’”?

Improve your credit

If you have bad credit, you won’t be able to take advantage of lower interest rates, so it’s crucial to make sure your credit is in top shape. Go to Federal Credit Reporting Website Check your credit report for free without affecting your score.

if you No great Credit, Start working hard today. Don’t let debt suffocate you. Take baby steps. You’d be surprised how improving your score by just a few points can increase your buying power and motivate you to keep going exist Your credit improvement journey.

Lock fixed and flip Now

A fixed and flipped It may take six months or more. So if you buy a home now that you are renovating, when you list your homeinterest rates will fall sharply. As the saying goes, rate a date, marry a house.

The market remains tight in many areas, so finding a home may be more challenging than fixing it up. Buy well, however, and you could reap rewards once interest rates drop.

buy to let

The reasons for buying a rental home are the same as the reasons for buying a fixer-upper. Buying now will help you avoid the peak, and you can always refinance once interest rates drop.

Consider waiting to refinance

If you have owned a property for many years, you may have significant equity and may think Use some of it to buy more real estate. Think carefully about refinancing now. Postponing may save money There is a rate Expected to plummet in 2025.

However, you also have to weigh the loss of opportunity by purchasing the investment to flip or keep (which can be refinanced later).

Begin renovations on your primary residence and plan to refinance after

If you own a personal home and have a significant amount of equity, start renovating it now to prepare yourself for a lower interest rate refinance.

Even if your home doesn’t need a complete makeover, simple touches can make a difference. These can include:

• Paint the walls
• tidy
• Replace flooring
• wood stain
• Add new cabinet hardware
• Kitchenware spray painting
• Add new tailgate
• Update bathroom fixtures
• add mold

These are relatively inexpensive upgrades, but they can have an impact when a bank appraiser comes to calculate your home’s value. Plus, they’ll make you feel better about living there, too!

final thoughts

When interest rates were last low, buying a home was difficult due to bidding wars and low inventory. That’s why waiting for interest rates to hit bottom is not a good idea. Conversely, if you’re considering buying your next investment, start now and finance later. With a rate cut coming in September and the potential for further cuts in the future, buying in 2024 will allow you to reap the benefits in 2025 without having to worry about this year’s tax bill.

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Notes on BiggerPockets: These are the opinions written by the author and do not necessarily represent the views of BiggerPockets.