Hey there!
As I write this, the Federal Reserve is meeting.
By the time you read this, they may have already announced what many analysts expect will be their second rate cut of 2024 – a quarter percentage point interest rate reduction.
At the time I’m sending this, they haven’t made an announcement yet. They’re expected to make it official by the end of the day.
(Note: I’m publishing this at 1:45 PM Eastern on Thursday. Due to the size of this newsletter, it may arrive in your inbox up to a few hours after my initial send time.)
Coming on the heels of September’s larger half-point cut, this move raises head-scratching questions about where the housing market is headed.
Let’s dig into what’s really happening.
First, some context:
September’s half percentage point cut marked the Fed’s first rate reduction since 2020.
The market’s response has been … uhhmmm …. interesting.
1: The Lock-in Effect Is Starting to Crack
Remember how roughly 70% of homeowners have mortgage rates below 4 percent? (We talked about that in a previous newsletter.)
That’s created a “lock-in effect” – nobody wants to give up their sweet, low-rate mortgage.
But here’s what the data shows:
- Mortgage applications rose 11% in the week after September’s cut
- Mortgage applications are now at the highest level since July 2022
Not a flood. But definitely a trickle.
More buyers are entering the market. The question is whether or not enough sellers will be willing to part with their homes in order to meet that demand.
(Source: Mortgage Bankers Association)
2: The Rate Disconnect
Here’s something fascinating:
While the Fed cut rates by 50 basis points in September, mortgage rates didn’t drop by nearly that much.
Why?
Because there’s a disconnect between Fed rates and mortgage rates. The Fed controls short-term interbank lending rates, while mortgages follow the 10-year Treasury yield.
But – and this is crucial – the Treasury yield responds to inflation expectations more than Fed actions.
(To be absolutely clear: The Fed’s actions definitely influence Treasury yields. I’m in no way implying otherwise. But traders tend to focus more heavily on inflation expectations when they’re determining the price of long-term bonds.
For example: bond yields jumped yesterday in the wake of the election results, as investors bet that President-elect Trump’s proposed tariffs will lead to higher inflation.)
3: The Hidden Market Shift
Here’s what most people miss:
The real estate market isn’t monolithic. Different price points are responding differently:
- Entry-level homes: Still extremely competitive
- Mid-range homes: Starting to see more inventory
- Luxury homes: Actually seeing price reductions in some markets, especially in the South
This creates opportunities if you know where to look – especially if you’re interested in cash-flowing investment properties.
4: The Construction Puzzle
New housing starts ticked up slightly in anticipation of September’s rate cut. But – and this is wild – we’re still not building enough to meet demand.
Why?
- Labor costs remain high
- Material costs haven’t fully normalized
- Local zoning restrictions still limit density
- Land costs near job centers keep climbing
5: The Strategy Shift
Smart investors are adapting their strategies:
A) Value-Add Opportunities: Properties that need work are sitting longer on the market. Buyers who can handle renovations are finding better deals.
B) House Hacking Evolution: We’re seeing creative approaches:
- Converting garages to ADUs
- Basement apartments
- Even carving out micro-units where zoning allows
C) Market Selection: Secondary markets are heating up:
- Cities within 2 hours of major metros
- University towns
- State capitals
- Healthcare hubs
Big picture?
Today’s expected rate cut isn’t just about rates – it’s about market psychology.
When the Fed signals confidence that inflation is cooling and rates are coming down, it boosts the confidence of both builders and buyers.
It also sets seller expectations at a higher threshold (they expect to be able to sell at a higher price point, due to more buyer competition).
And it aids (slightly) with lender risk assessment — lower fixed rates means less default risk.
But here’s what fascinates me:
Most investors are so focused on rates, they’re missing the larger transformation happening in real estate:
- Remote work is reshaping where people can live
- Zoning reforms are slowly opening up new opportunities
- Alternative financing options are emerging
- Building technology is evolving
What This Means For You
The key is being prepared for any scenario. That means:
- Running multiple scenarios on any potential purchase
- Maintaining higher cash reserves than usual
- Being ready to act quickly when opportunities arise
- Understanding local market dynamics deeply
- Being ready to invest out-of-state / long-distance to snag better deals
Source: Afford Anything
