The Federal Reserve cut interest rates by half a percentage point on Wednesday, the first cut in several years, and the benchmark federal funds rate now ranges from 4.75% to 5%.
The interest rate cut is likely to have an impact on the luxury housing market, as nearly half of luxury home purchases are made with cash, as industry experts expect it to boost confidence and activity across all real estate sectors, potentially boosting prices for prime properties.
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Ron Shuffield, president and CEO of Berkshire Hathaway HomeServices EWM Realty in South Florida, sees the rate cut as a positive. “The Fed rate cut today is good news for everyone,” he told Mansion Global.
“While high-value home buyers often don’t have traditional mortgages, interest rate fluctuations affect everyone, whether it’s a mortgage, business financing, personal finances or lines of credit that you borrow and repay – all of which are based on interest rates,” Shufield said.
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Low interest rates are expected to have their most noticeable impact on the lower and mid-market segments of the housing market, where traditional lending is more prevalent, but the luxury housing market will not be immune.
Mortgage rates have already been declining, according to Freddie Mac, to 6.2% as of Sept. 12, the lowest level since February 2023. Following the Fed’s decision, this downward trend is likely to continue.
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Ian Slater, a New York City-based real estate agent with Compass, noted that the real estate industry is excited about the rate cut. “There’s even more excitement now that we know the Fed cut rates a lot, by 0.5 percentage points, compared to the 0.25 percentage points that were expected,” Slater said.
Despite the prevalence of cash purchases in the luxury market, Redfin reported that 44% of luxury home purchases were made with cash in the second quarter. Lower interest rates are expected to bolster market sentiment. Slater predicts that “the luxury home market will remain strong through the remainder of 2024 and could be even stronger in 2025.”
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The impact of lower mortgage rates on purchasing power is more pronounced in expensive urban areas: In the San Jose, California, metropolitan area, where the median home price hit $1.4 million in August, a hypothetical drop in mortgage rates to 5.5% could boost purchasing power by $110,000, according to Realtor.com data cited by Mansion Global.
Matthew Lesser, a senior partner at brokerage Leslie Garfield in New York City, believes the rate cut will spur more market activity. “Historically, this leads to increased volume, which should drive prices higher due to increased demand,” Lesser said.
All-cash buyers at the top of the market also indirectly benefit from lower interest rates. “These buyers use leverage in their everyday lives, in their businesses, in their investments,” Lesser says. Lower interest rates would boost consumer confidence and give them more opportunity to buy more property.
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