Fed Cuts Interest Rates Down to 4.8%; Here’s What It Means for the Housing Market and Mortgages

General Scenes Of Sydney Property As Government Faces Pressure To Change Rules On Negative Gearing — (Photo : Brendon Thorne/Getty Images) SYDNEY, AUSTRALIA - APRIL 28: A for sale sign is displayed outside a home in Edmondson Park on April 28, 2016 in Sydney, Australia. A report by The Grattan Institute release on Monday found the top 10 per cent of earners collect nearly 50 per cent of negative gearing tax deductions, prompting calls for the Federal Government to change tax breaks on housing investment available through negative gearing and capital gains tax discounts.

The Federal Reserve on Wednesday issued its first interest rate cut in four years, slashing its benchmark rate by a half point. This cut brought the Fed's interest rate down to 4.8%, which could also bring mortgage rates lower.

The central bank's recent cut lowered its key rate to 4.8%, down from its two decade high of 5.3%. The Fed also signaled they could make another half-point cut before the end of the year, which means its rate would fall to 4.3%.

"We know it is time to recalibrate our (interest rate) policy to something that's more appropriate given the progress on inflation," Chair Jerome Powell said. "We're not saying, 'mission accomplished.' But I have to say, though, we're encouraged by the progress that we have made."

What This Means for Mortgage Rates

The Fed's interest rate indirectly influences mortgage rates. However, it influences other factors in the financial market that influence borrowing rates, including mortgages.

Some experts believe mortgage rates will also drop by the same percentage points as the Fed's cuts. As of the week ending Sept. 12, the contract rate for the 30-year mortgage term was 6.2%. The rate for the 15-year term was 5.27%.

With a half-point cut, that means the mortgage rates will fall to 5.7% for the 30-year term and 4.77% for the 15-year term.

Lower mortgage rates would bring relief to hopeful buyers, especially those who have been pushed to the sidelines due to the rising costs of homeownership.

What This Means for the Housing Market

In addition to bringing back buyers, a lower mortgage rate could also encourage homeowners with low-rate mortgages to sell their properties. This would create a flood of existing homes to the market, improving the inventory.

A rise in housing supply could lower home prices. This could pull hopefuls out of the rental market, lowering rent prices.

That said, a drop in mortgage rates could raise home prices in some places, especially in areas with more competition for the same pool of houses.