On 18 September 2024, the U.S. Federal Reserve announced an aggressive rate cut of 50 basis points for the first time in four years. This is poised to bring significant economic consequences and impact on the real estate market.
On 18 September 2024, the U.S. Federal Reserve announced an aggressive first rate cut of 50 basis points since year 2020 to a range of 4.75%-5.00%.
This is poised to bring significant economic consequences. By reducing interest rates, the Fed aims to stimulate economic growth, with several direct and indirect outcomes.
This 50-bps rate cut was deeper than the anticipated 25-bps, marking the official beginning of the Fed’s rate-cut cycle, as announced by Federal Open Market Committee (FOMC) Chair Jerome Powell.
The Fed has initiated this cycle with a 50-bps reduction, signalling another 50-bps cut likely in 2024, and is targeting an additional 100-bps reduction in 2025. With reference to the graph below done by UOB Global Economics & Markets Research, the forecasted rate by end 2025 will drop to 3.50%. The FOMC has expressed increased confidence that inflation is sustainably moving toward the 2% target, allowing for rate cuts to better address concerns in the labor market.
What will be the impact on the Overall Real Estate Market?
1. Lower Borrowing Costs: One immediate effect of rate cuts is a reduction in borrowing costs. As the Federal Reserve lowers interest rates, lenders reduce rates for loans and mortgages, making it less expensive for individuals and businesses to borrow money. This encourages spending and investment in various sectors, from housing to small businesses.
2. Higher Affordability: Lower interest rates translate to more affordable mortgage payments and loan terms, making homeownership and large purchases more attainable for a broader range of consumers. With reduced monthly costs, buyers can stretch their budgets further, increasing their purchasing power and driving demand in sectors like real estate.
3. Investor Interest: Lower interest rates tend to push investors toward riskier, higher-yielding investments. As returns on savings and bonds decline, investors often turn to real estate, equities, and other assets that offer better potential returns. This renewed interest can drive asset prices higher and fuel growth in various markets.
4. Increased Market Activity: The combination of cheaper borrowing costs, improved affordability, and investor interest tends to spur higher market activity. In real estate, this means increased sales, property investments, and potentially rising home prices due to higher demand. Other markets, like retail and business investments, can also see heightened activity as consumers and businesses take advantage of favorable borrowing conditions.
These consequences can be seen as leading indicators, especially in terms of their potential to signal upcoming economic growth. Cheaper borrowing costs and increased market activity are often precursors to broader economic changes, such as rising home prices or increased consumer spending, which can shape the economy's trajectory in the months and years following the rate cuts.
In conclusion, the upcoming FOMC meetings on November 6-7 and December 17-18 will be key events to watch as we move towards the end of 2024. These meetings could provide crucial insights into the Federal Reserve's policy direction, especially in light of evolving economic data and inflationary pressures. Market participants and analysts will be closely monitoring the outcomes, as they will likely shape financial conditions heading into the new year.
Stay informed and prepared as these pivotal moments approach.
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