Mortgage rates approach 6% as Fed makes first rate cut this year 

While today's quarter-point rate cut by the Federal Reserve — the first in nine months — came as no big surprise, the question now is whether it will be enough to energize the real estate market.

The Sept. 17 cut puts the short-term interest rate in the 4%-4.25% range, according to a statement released by the Fed. The board's projections suggest there could be two more cuts before the end of 2025, lowering the rate by another 50 basis points.

While the stock market was mixed following the Fed's announcement, real estate stocks were up. Offerpad and Opendoor — whose stock has been on a wild ride for the past few months — were seeing the biggest jumps, with each of the iBuyer's shares up around 14%.

A 'risk-management' decision: There wasn't much support for a more aggressive cut, Fed Chairman Jerome Powell said in a press conference following the meeting.

"I think you can look at this in a way as a risk-management cut," Powell said, adding that he still expects inflation to move up, but at a slower pace than the Fed expected when tariffs were first introduced. Back in May, when economic uncertainty loomed, Powell said he "couldn't confidently say" if the board would make any cuts this year. 

An economic tug-of-war: The September meeting was held while opposing forces were pulling on the overall economy, but it appears that the Fed is now more concerned about keeping the labor market from weakening further than working to push the inflation rate down to its goal of 2%. In August, retail inflation came in at 2.9%.

The latest move could have a significant impact on what happens with home sales this fall — if it results in 30-year mortgage rates falling below 6%, a level some in the industry consider a psychological barrier for buyers.

While short-term interest rates are not tied to mortgage rates, they do influence investor purchases of 10-year Treasury bonds, which have a more direct impact. 

Are sub-6% rates a possibility? They might get close — but probably won't drop much further following today's 25-point cut. Real estate economists generally believe the cut was already priced into mortgage rates before the Fed decision. The average 30-year rate was 6.13% on Sept. 16, according to Mortgage News Daily, down from 6.59% a month ago.

"Now we go back to data watching for the direction of mortgage rates for the rest of the month," said Melissa Cohn, regional VP of William Raveis Mortgage.

Refis surge: The recent decline in mortgage rates has homeowners rushing to lock in refis, according to the Mortgage Bankers Association. Refinance applications for the week ending Sept. 12 were up a whopping 70% compared to a year ago, while purchase applications were up 20% for the same period.

If mortgage rates can remain near the 6% level, that should continue to stimulate mortgage activity, according to MBA Chief Economist Mike Fratantoni.

"Origination activity will be boosted, both for homeowners who purchased in the last three years and can realize considerable savings at these rates, and for potential homebuyers, who now have one more reason to look for a home, in addition to increasing housing supply in many markets," Fratantoni said.

What this means for builders: Lower short-term interest rates impact homebuilders as well. The construction industry has been dealing with rising material costs and weak homebuying demand, dampening builder sentiment and pushing housing starts to the lowest level in more than a year.

In August, housing starts fell to a seasonally adjusted annualized rate of 1.31 million, according to the U.S. Census Bureau, down 8.5% from July and off 6% off year-over-year.

Today's rate cut could "lead to lower interest rates for building and land development loans, which will help builders to boost housing production," said Robert Dietz, chief economist at the National Association of Home Builders.

The bottom line? Signals are still cloudy: Given the volatility of the economy in recent months, it's possible that rates could move back up, said Danielle Hale, chief economist at Realtor.com.

"But for now, consumers have already benefited from the drop in mortgage rates that has brought mortgage rates below 6.5% for the first time in nearly a year and is likely to continue at least through this week."