The Fed Rate Cut and What it Really Means for Your Wallet - Orlando and Beyond with Krista

Now then, as we mentioned just before the break, there has been some breaking news in the past few minutes. In a significant move for the US economy, the Federal Reserve has cut interest rates for the first time in four years. Let's speak to it. We've decided to reduce the degree of policy restraint by lowering our policy interest rate by a half percentage point. It's the discussion that's happening in every brokerage across America right now. The Federal Reserve this week made a half a percentage point interest rate cut. What is this going to do to buyer demand? Is this going to make every buyer who's on the fence right now come out of the woodwork and try to buy a house? That's what we're going to talk about in this video. And the answer is not as straightforward as you might think. In this video, I'm going to break down what this rate cut means for you, how it's going to affect your wallet, and if this is the game changer that the housing market needs right now. But before we dive into the details of this rate cut, it's really important to understand the role of the Federal Reserve in the economy. The Fed is responsible for ensuring economic stability, and this includes managing inflation and providing for maximum employment. And one of the primary tools that they use to do this is by adjusting the interest rates. When inflation rises too quickly, prices on everything from homes to groceries go up. And then the Fed steps in and raises interest rates so that demand and prices go down. Higher rates discourage borrowing and spending, and therefore demand, and that makes the prices come back down and keeps them in check. On the other hand, when the economy weakens or job growth slows down, the Fed steps in and lowers rates, which stimulates borrowing and stimulates spending. The latest cut in the federal funds rate, half a percentage point, is aimed at stimulating the economy by lowering borrowing costs across the board. But how does that then filter down and come to you? And how will it affect your mortgage or your next home purchase? In order to understand that, we're going to look at exactly what a rate cut is and why you should care about it. The federal funds rate, or the overnight rate, is the rate at which banks borrow money from the Federal Reserve. When the Fed cuts this rate, it becomes cheaper for banks to borrow money, and then they can pass that on to consumers in the form of loans given out to people like you and me, such as car loans or mortgages or small business loans. And this is why when the Fed makes a move like it did this week, it often grabs the headlines. For homeowners or potential buyers, lower rates means homeownership can become more affordable, more affordable mortgage payments, meaning that homeownership is more within reach. But it's not always that simple, because even though a Fed interest rate cut can mean a lower mortgage rate, there are many factors actually at play, including how quickly markets adjust to the news. Meantime, mortgage rates falling to their lowest level since February 2023, rates falling for more than half a percent over the last six weeks, according to Freddie Mac. One thing that's really important to understand, especially in this week's news, is that mortgage rates are often influenced far before the Fed actually announces a rate cut. Why is that? Because usually mortgage and bond markets anticipate these moves long before the Fed makes the announcement. Even without a Federal Reserve interest rate cut, mortgage interest rates have hit an 18 month low, the senior vice president of Origin Point Lending explains. So if investors anticipate that the Fed is going to lower the rate, they will usually do that in advance of that actually being announced. For example, there was an article a couple of months ago that said there was already a, quote, 100 percent certainty that there would be at least a 25 point basis cut. We got 50, which was reflected in mortgage rates already. So this means that sometimes after a Fed announcement, mortgage rates don't drop as much or they may remain steady because the change was already in place before that point. So on the flip side, if the Fed surprises the market with a larger than expected cut, which is what they did this time, they went down 50 basis points rather than 25, then mortgage rates may still drop a little bit further. We'll see. And this is essential to keep in mind if you are thinking about buying a home or possibly refinancing. The Fed's actions are important, but they're not the only thing that's going to influence that interest rate that you're going to get. By the way, in case we haven't met, my name is Krista Tarnes and I've been a realtor in the Central Florida market since 2009. And if you're finding value in this video, I would greatly appreciate if you would consider liking and subscribing as it does help my channel to grow and get these market shifts and economic news out to more people. So let's talk about how potentially this rate cut could affect your ability to buy a home if you are in the market right now. So if your budget is $2,500 per month and that's supposed to be your mortgage payment, at a 6% interest rate, you would be able to afford a home of about $417,000. But if mortgage rates were to drop to 4%, that same $2,500 a month would now get you a home worth $524,000. That's a significant difference and that's why it's important for you to follow what the Fed is doing and pay attention to those rate changes. However, it is also really important to remember that the interest rate that you're offered by a bank or by a lender is not entirely or solely dictated by what the Fed is doing. It also is going to come down to your credit score, the amount of money you have to put down on a home, the loan type that you're using. All these things weigh in to give you the interest rate that you're finally offered. So that's one of the reasons why it's super important to shop around and consider all these factors when you are shopping for a loan. And go ahead and ask your lender for the best rate that they can possibly give you. Make sure that you're doing your best to get that rate as low as you possibly can. Taking a few extra hours or days to shop around can save you literally tens of thousands of dollars over the life of your loan, especially if you're getting a 30-year loan. So take that time to research really, really well. Now you've probably heard, or you will hear, realtors say that when interest rates go down, housing prices will go up because demand will skyrocket. But let's come back to the point that real estate is hyper-local and every market is different. There are so many local factors that need to be taken into consideration. Are people moving to your area? How's the economy? How's the job market? How many houses are for sale? What's the situation like with new construction going on? For instance, in some markets, if there is a lot of new construction going on, prices may stay steady. They may even drop a little bit if supply outpaces demand. But there are certainly plenty of markets across the U.S. where supply is still really low. You're still seeing multiple offers and prices there could go up or continue to go up because there are more buyers competing for fewer homes. And that's why it's so important to stay on top of what's happening in your own local market. Now national trends, of course, follow those too, but your local situation is going to have equally as big an impact on your housing market. So why has the Fed decided to lower interest rates right now? Well, we have to go back to the Fed's original mandate, which I discussed at the beginning of the video, one half of which is to keep inflation under control. Experts are saying that the main reason why they are lowering the interest rates right now is to prevent us from going into a complete recession. And this follows a period of 11 interest rate increases over a year and a half period. And when the Fed raised its benchmark interest rates, that was to fight inflation. But in recent months, we've been seeing that the job market has slowed and the economic growth has slowed. And so now the Fed needs to ease up on that. The number of job openings in the U.S. is the lowest it's been since January of 2021 and economic spending is down. It's slowed. In the labor market, conditions have continued to cool. Payroll job gains averaged $116,000 per month over the past three months, a notable step down from the pace seen earlier in the year. The unemployment rate has moved up but remains low. The Fed needs to walk a fine line, and the more you get into this, the more you understand. The Fed needs to keep inflation under control while ensuring that economic growth doesn't stall out completely. So in cutting these rates, the Fed is hoping to boost borrowing and therefore spending. And this can help to stabilize the economy. But here's the catch. Just because they've lowered the federal funds rate doesn't mean we're in the clear. There's still a lot of uncertainty. And if they lower it too quickly, that can kick up inflation, which means they would have to then raise the interest rate again. But in general, this move by the Fed indicates that they feel that inflation is under control. After all those steep increases, they've now come down, and pretty aggressively. And this is showing that they don't want to get behind in the job market. So the next three months, the next six months, are really crucial. Will the Fed cut rates again? Are we headed for a recession anyway? Are we in a recession? Some people think we're in a recession. The next six months are crucial in determining how the economy reacts. The key takeaway here for me is that while a Fed rate cut can affect the housing market and mortgage rates, it's not always a guaranteed one-to-one effect. If you are looking to buy a home right now, it's a good idea to stay informed on your local market and consult with a lender to understand how these changes might affect your ability to buy and how it might impact your specific situation. Thanks as always for watching, and I'll see you next week.