After months of anticipation, the Federal Reserve reduced interest rates last week by half a percentage point. This move will impact the housing market, and potentially your own mortgage, although it might not significantly ease the affordability issues that many potential new homeowners face. 

Here are four points to consider.

This may be the time to refinance your existing mortgage

With interest rates on the decline, it’s a prime opportunity to consider refinancing your mortgage. If you’ve been locked into a high-rate mortgage, now might be the perfect time to explore refinancing options. In fact, mortgage rates fell by 0.5% after the rate cut which can potentially reduce your monthly payments, freeing up cash flow for other important expenses or savings. 

It’s important to act swiftly, though. As mortgage rates fluctuate, waiting too long might mean missing out on the best rates available. Start by shopping around, comparing offers from multiple lenders to find the best deal. Many lenders are competing for your business, especially since the refinance market has slowed significantly. This competitive landscape could work in your favor, granting you better bargaining power. Our advice: shop around for the perfect opportunity to refinance.

Remember, refinancing isn’t just about lowering your rate. Consider shortening your loan term or switching from an adjustable-rate mortgage (ARM) to a more stable fixed-rate option. These changes can save you money in the long run and provide greater financial stability. If you’re not sure where to start, consulting with a mortgage or financial advisor can help navigate the complexities of refinancing. With the right guidance, you can make a savvy financial decision that benefits you both now and in the future.

Housing prices could jump as a result of lower rates

Here’s the bottom line: Even with lower mortgage rates, buying a home may not get any easier. It could actually make things harder and push home prices higher. 

This is because reduced mortgage rates tend to draw more buyers into the market, increasing competition for an already limited housing supply. Unfortunately, the situation is particularly challenging for first-time homebuyers. Kim Kronenberger, a real estate agent in Denver, expresses concern for those buyers who are holding out, hoping affordability will get better. 

“A lot of those buyers, they absolutely have regret,” Kim stated about individuals who missed the opportunity to purchase a home at the beginning of the pandemic, when interest rates were low and home prices hadn’t yet surged. “Because had they bought four years ago, they would have been in a whole different place than they are now.”

You could find your dream house thanks to increased housing supply

A significant reason behind today’s high home prices is the shortage of available homes: the U.S. is lacking millions of housing units. The supply simply hasn’t matched the growing demand, particularly as millennials are now forming households and venturing into homeownership. 

High interest rates have been another stumbling block, making it tough for some homebuilders, especially smaller private developers, to kickstart projects. This is because the interest on builder loans for acquisition, development, and construction are closely connected to the Fed’s rate. 

All this considered, the recent rate cut should provide a much-needed boost for these developers, enabling them to ramp up construction. The forecast for lower mortgage rates is likely to draw more buyers into the market, which in turn motivates builders to initiate construction. This development bodes well for the housing market’s supply side—more homes being built and entering the market will help alleviate the demand that drives up prices. However, it will take a while for these new homes to be ready.

You should still watch your budget since affordability isn’t assured

Falling mortgage rates can certainly make monthly repayments cheaper for homebuyers. However, with high housing prices, affording a home can still be a challenge for many. 

Wells Fargo economist Dougherty points out that since early 2020, home prices have surged by about 50%, outpacing the growth in average household incomes. “This significant rise in prices has made housing unaffordable for a large number of potential buyers,” he explains. 

During the pandemic, an overwhelming number of homeowners refinanced their mortgages to take advantage of historically low rates. According to the Consumer Financial Protection Bureau, nearly 60% of existing mortgages now have rates under 4%, making these homeowners unlikely to refinance again. 

Moreover, many homeowners are still hesitant to sell their properties because they would be facing higher rates on new mortgages today. Although lower interest rates can slightly ease this “lock-in effect,” they are unlikely to completely change this reluctance. 

Greg McBride, the chief financial analyst at Bankrate.com, observes that the recent decrease in mortgage rates hasn’t significantly revived the housing market. “Home prices are still at peak levels, and the housing inventory remains below what it was before the pandemic,” he says. “It’s unlikely that either of these factors will improve significantly in the near future.”

To sum up, it’s going to take more than a half point interest rate cut to fix the housing affordability crisis, but if you’ve been planning to refinance or have a carefully set home budget, this is the moment to start exploring some options.