As the Federal Reserve anticipates future rate cuts, there's a golden opportunity for prospective homebuyers to capitalize on lower mortgage rates. Just as Olympic gold medalists perfect their game plans and execute precise timing, now is the moment for buyers to make their move in the housing market. Waiting could prove to be a costly mistake, much like runners who wait too long for their final push and miss out on a medal.

The Current Landscape

In recent months, mortgage rates have seen a significant drop. According to Mortgage News Daily, rates have decreased from 7.5% in April to 6.34% today. This drop presents a critical opportunity for buyers who have been sitting on the sidelines, waiting for rates to fall further. However, waiting could result in missed opportunities and higher costs in the long run.

Understanding Mortgage Rates and Federal Reserve Cuts

It's important to understand how long-term mortgage rates move ahead of Federal Reserve rate cuts. The Fed has not cut rates since the historical increases from 2022 through 2023, yet mortgage rates have fluctuated significantly, even reaching over 8% last October. This movement is influenced by investors' expectations of the Fed's short-term Federal Funds rate policy.

With inflation easing, the job market cooling, and unemployment rising, it is becoming evident that the Fed may need to cut rates when they meet in mid-September. As a result, mortgage rates have already plunged from 6.91% to 6.34% in less than two weeks. However, buyers should not expect mortgage rates to drop further when the Fed cuts the Federal Funds rate. These cuts will primarily affect short-term rates, such as those for credit cards, automobile loans, and equity lines of credit, but not long-term mortgage rates.

The Impact on Homebuyers

Today's mortgage rates already factor in future rate cuts totaling 1.25%. If the economy continues to cool, rates may fall further next year. However, with the recent drop in rates, affordability has improved dramatically. More potential buyers now qualify for mortgages, and those already in the market have seen their purchasing power increase, allowing them to afford higher-priced homes.

Market Dynamics and Timing

With improving affordability, demand is expected to rise just as inventory reaches its summer peak and begins to fall. As demand increases and supply decreases, market times will shorten, leading to more buyer competition and rising home values. For example, a buyer looking to purchase a $1 million home today with a 20% down payment and a 6.5% mortgage rate would face a principal and interest payment of $5,057. If home values rise by 5% due to increased demand and constrained inventory, that $1 million home would appreciate to $1,050,000. Even if rates drop to 6%, the monthly payment would be $5,036, only $21 less per month. Waiting could result in losing out on $50,000 in appreciation and an additional $10,000 in down payment.

Refinancing Opportunities

For buyers concerned about future rate drops, there is always the option to refinance. If rates drop to 5.5%, refinancing could save a buyer significant amounts on their monthly payments. For example, a buyer who purchases a $1 million home today and refinances next year could see their monthly payment drop from $5,057 to $4,542, saving $515 every month or $6,180 annually.

Market Snapshot: Orange County

Today, the Orange County inventory is at 3,426, up 28% compared to last year, offering more choices for buyers. Demand, measured by the number of new pending sales over the prior month, remains close to last year's levels. With higher inventory and stable demand, the Expected Market Time has slowed to 67 days compared to last year's 47 days. However, as rates remain low and demand rises, the inventory is expected to fall, and market times will decrease for the remainder of the year.

Conclusion

Now is one of the best times to purchase a home in the past few years. With improving affordability, increased demand, and a constrained inventory, buyers have a unique opportunity to make a smart investment. Just as Olympic athletes must make timely decisions to succeed, buyers should seize this window of opportunity and act now. Waiting could mean missing out on favorable conditions and financial benefits.

The time to buy is now. Don’t wait and second-guess yourself. Make the gold medal decision and pull the trigger today.

For a buyer looking to purchase a $1 million home today with 20% down and a 6.5% rate, the principal and interest payment would be $5,057. Due to a further constrained inventory and increased demand, values are anticipated to rise at least 5%. That $1 million home would appreciate to $1,050,00. Even if rates drop to 6%, the monthly payment would be $5,036, nearly identical to today’s payment at 6.5%. It is only $21 less per month or $252 annually. In waiting, the buyer loses out on $50,000 appreciation and is looking at a $10,000 additional down payment.

What if 30-year rates drop to 5.5%? Isn’t it better to wait until that occurs? There is a rule of thumb when it comes to refinancing: when mortgage rates drop by 1% or more from the current locked-in, fixed rate, then it is an excellent time to refinance. The buyer that purchases a $1 million home today could refinance next year if rates fall to 5.5%. The monthly payment would drop from $5,057 to $4,542, a savings of $515 every month or $6,180 annually.

For the buyer who waits to purchase until next year, the $1 million home is anticipated to appreciate at least 5% to $1,050,000. The monthly payment would be $4,769. That is $227 per month higher or $2,724 annually compared to purchasing now and refinancing once rates drop to 5.5%. In addition, waiting requires an extra $10,000 in down payment, and the buyer once again misses out on $50,000 in appreciation.

Today is already one of the best times to purchase in the past couple of years. The Orange County inventory is at 3,426, up 28% or 951 homes compared to last year. There are way more choices in every price range. Demand, a snapshot of the number of new pending sales over the prior month, is at 1,530, down 3% compared to last year, 50 fewer pending sales. With much higher inventory levels and demand on par with the previous year, the Expected Market Time, the number of days it takes to sell all Orange County listings at the current buying pace, is 67 days, much slower than last year’s 47-day speed. As rates remain at these low levels with duration, expect the inventory to fall, demand to rise, and the Expected Market Time to drop for the remainder of the year.

The most favorable condition for buyers is NOW. Just like so many Olympic athletes crossing the finish line first, it is time for buyers to make that gold medal decision and pull the trigger now. Do not wait.