Fed Cuts Rates: Who Needs to Rate Lock and Refinance ASAP

0:00The Federal Reserve finally cut rates this week for the first time in nine months. Does that mean we're about to see lower mortgage rates? That's the key question that every real estate investor needs to understand. But it's more complicated than simply saying the Fed cut rates. That means mortgage rates are going to go down. So today I'll break down all the factors that could impact mortgage rates and your investing in the near future. and I'll give you my projection for what mortgage rates to expect for the rest of 2025.

0:36Hey, everyone. Welcome to the BiggerPockets podcast. Thank you all so much for being here. It has been a very big week for economic news. Most notably, the Federal Reserve met and made a decision about mortgage rates. So I'm going to, in this episode, recap what happened. I'll also give you my analysis of what it means for mortgage rates, including my take on this Bank of America analysis that we could be on a path to 5 % mortgage rates. And I'll give you my thoughts about whether or not it's a good time to lock in rates and buy a new property or refinance an existing mortgage right now. Let's get into it.

1:17So first up, what just happened? I am sure you probably saw this on the news or on social media, but the Federal Reserve met and they decided to cut the federal funds rate by 25 basis points. It was sitting at a range between 4.25 and 4.5. Now it's at 4 % to 4.25%. Now this is an important change, but it wasn't altogether very surprising. Pretty much everyone knew that this was going to happen if you pay attention to this stuff. Now it's important to know, I know a lot in the news is about Jerome Powell, who is the chairman of the Federal Reserve. But he doesn't set interest rate policy or monetary policy all by himself.

2:00There is actually a group of Federal Reserve governors who do this. And it is notable that all of them, except the newly appointed Stephen Moran, agreed that 25 basis points was the right amount. The newest Fed governor, Stephen Moran, actually was the one dissent. He voted for a 50 basis points cut, but was outvoted by the other governors. And that's why it was 25 basis points. Now, why did they do this? Why did the Fed, after years of relatively higher rates and after nine months since the last rate cut, why did they decide now was the time to do it? The short answer is that the labor market is getting weaker.

2:43We've talked about it on the sister show on the market. You can listen to that if you want to. But there's all sorts of data about the labor market. None of it is perfect. There's just a ton of different ways to measure it. But if you look at this sort of whole universe of labor market data that we have, it shows a weakening labor market. And that means that the Fed usually needs to take action. The Federal Reserve's job is to balance maximizing employment and controlling inflation. And they've been erring on the side of controlling inflation over the last couple of months, saying that they want to see what happens from the new tariffs and if that's going to push up inflation before they cut rates to stimulate the job market.

3:25That calculus really over the last two or three months has changed because the labor market has gotten worse. And And although inflation is going up, it is not as hot as a lot of economists were fearing six months ago. And that paved the way for the Fed to cut interest rates 0.25, which is basically the smallest cut that they make, but not any more than that. So this should have some stimulative impact on the economy. I'll share more of my thoughts later, but personally, I don't think a 0.25 cut is really going to make that big of a difference in so many things. But something else did happen yesterday that is really notable.

4:05The Fed releases what they call the summary of economic projections. It's basically a little data set about what the Fed governors, all the people who vote on these things, think about the future of interest rates. Because like I said, we all knew that this cut was happening yesterday, but we don't know what they're thinking about how many more cuts are going to happen in the future. They have something they call the dot plot. That's what everyone is always foaming at the mouth to see. It basically shows what Fed governors think is going to happen to interest rates for the rest of 2025 into 2026, 27 and 28.

4:44So what the dot plot shows right now is we're at four and a quarter right now for the federal funds rate. And the expectation is that there will be two more cuts this year, getting us down to by the end of 2025 to about 3.5. Then when you look out to 2026, 27 and 28, there is less consensus, but generally it shows it moving down closer to three. So another one and a quarter percent declines are projected roughly between now and 2027. Now that should be good news for the economy. That level of cuts should be stimulative across a broad spectrum of the economy. But it is really important to note that these Fed dot plots are not always right.

5:33And over the last couple of years, they've just been really, really wrong. The Fed has thought, you know, if you ask them where interest rates were going to go in 2022, they were completely wrong. If you asked in 2023, they were completely wrong. And that's just because the Fed is data driven. Their goal is not to be accurate in forecasting. They do this sort of to help the business community understand where they think things are going to go, but they are going to react to data and make adjustments in real time. But that's what has happened so far. So, of course, for everyone listening on this show, you are probably wondering what this decline in the federal funds rate means for mortgage rates.

6:15Now, we talk about this on the show quite a lot, but I do want to give a quick review of the relationship between the federal funds rate and mortgage rates, because I see a lot of people on social media saying, oh, the federal funds rate, the Fed's going to cut rates. That means mortgage rates are going to go down. Often that does happen, but it is not automatic. This is not a one to one relationship where, oh, the Fed cut rates a quarter of a point. Mortgage rates are going to fall a quarter of a point. That is not how it works. Mortgage rates are actually most closely, almost exactly correlated to the yield on a 10-year US Treasury.

6:52This is a form of US bond. When 10-year Treasuries go up, mortgage rates go up. When 10-year Treasuries yields go down, mortgage rates go down. So that's the main thing we need to look at with mortgage rates. So when we look at mortgage rates where they are right now, I think there has been a meaningful change in mortgage rates over the last couple of months. Like I said, as of right now, They are trading close to 6.2, 6.25%. I am recording this on September 18th. Actually, yesterday on the 17th, they dropped to the lowest level in basically a year. They're at about 6.1%, but they have since gone back up.

7:28And that is an important thing to note, that they cut rates and mortgage rates went up the next day. Not a ton, but they did go up. And that is because, like I said, everyone knew this Fed rate cut was coming. And mortgage rates, along with the stock market and the bond market and the crypto market and everyone, they make their trades, they make their moves before the Fed actually makes this decision because everyone knew it was coming. So for example, why would a bank wait to offer better rates on a mortgage if they knew in a week or two there was going to be a lower federal funds rate? They all do that to try and stimulate demand for refinances or purchase applications because they know that this is coming and so they can move mortgage rates lower in anticipation of that.

8:17So for that reason, when the Fed actually goes and cuts rates, it's kind of a non-event. It's the lead up to the rate cut and the Fed sort of telegraphing that they were going to make this rate cut that actually mattered so far in terms of rates. That said, that's pretty good. I think if we're sitting at roughly six and a quarter points for mortgage rates, that's great. It wasn't very long ago that we were seeing mortgage rates near seven for a 30 year fix. And this is for an owner occupied loan. And that might not seem a lot because that is still a relatively high mortgage rate compared to where we were over the last couple of years.

8:56But that is approaching a relatively normal mortgage rate on a very long term basis. If you look back 30 or 40 years, the average on a 30 or fixed rate mortgage is in the high five. So we're getting closer to that. And just if you bought the average price home in the United States right now, 400, $420 ,000. The drop from a 7 % mortgage to a 6.25 % mortgage is going to save you$150-ish, which is probably 7%, 8 % of your monthly payment. That is meaningful. That can actually bring more people into the housing market, or for people who are already searching and looking in the housing market, it just means that your payments are going to go down.

9:45So that's positive news. All right, so that is what has happened so far with the federal funds rate and mortgage rates. We got to take a quick break, but when we come back, we're going to talk about the outlook for mortgage rates for the rest of this year and into 2026 and what this all means for real estate investors. We'll be right back. This week's bigger news is brought to you by the Fundrise Flagship Fund. Invest in private market real estate with the Fundrise Flagship Fund. Check out Fundrise.com slash pockets to learn more. Summer bookings sound great until someone slips by the pool, gets hurt on your dock, or damages your property during a long holiday weekend.

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14:02Welcome back to the BiggerPockets podcast. I'm Dave Meyer. Thank you for joining us for this reaction to the news that the Fed cut the federal funds rate yesterday. We talked about what has gone on so far, but as I am sure all of you are wondering what happens next, we're going to look now at how mortgage rates might move into Q4 2025 and into 2026. I will start with sort of what we call the consensus view, which is basically if you aggregate and look at all the forecasters out there, all the experts, what they think is going to happen. I'll start there and then I will share with you my personal opinion about what's going to happen with mortgage rates in just a minute.

14:45Consensus vibe today is that mortgage rates are probably going to continue easing a little bit into the end of the year because the yield on the 10-year U.S. Treasury drifts lower. Remember, I said that it's at about 4.1%. The general opinion is that's going to get lower as the labor market continues to soften. So when I'm talking about this consensus view, basically, people are saying the read on the situation is that bond investors are generally more fearful of a recession right now than they are of inflation. Now, it's important to note that both of these things are a concern right now. Inflation is going up.

15:31We've seen inflation go up the last couple of months. But based on the way things are moving and the data, it does appear that the fear of recession is sort of winning out and therefore bond yields are going down, but only slowly. I think if inflation hadn't gone up the last couple of months, we would probably see bond yields in the high threes right now instead of at 4.1 or 4.2 percent. But it is a more measured response right now because we are seeing both of those things happen at the same time, mildly higher inflation and the labor market starting to weaken. So when we start to look forward and ask ourselves, are mortgage rates going to keep going down for the rest of this year?

16:12Unfortunately, it's just a big maybe. You know, I know people are going to point to the fact that there are likely to be two more federal funds rate cuts and say, yes, that means that there is going to be further declines in mortgage rates. And that definitely could happen because the federal funds rate and yields are related. Like I said, they're not perfectly correlated, but they are related. These things do impact one another. And so really what it comes down to is inflation. If inflation remains where it is or potentially even goes down a little bit, we will probably see mortgage rates come down.

16:50I think, you know, another quarter of a point by the end of the year, closer to six, and we'll probably fall further in 2026, assuming the Fed does what it says it's going to do and inflation stays relatively mild. But that is a big if right now because we've seen inflation go up two or three months in a row. And if inflation stays high, or even if bond investors are fearful that inflation is going to stay high, I don't think we're going to see that much movement in mortgage rates. If inflation goes up, we could see mortgage rates go back up. And right now it's really hard to forecast because inflation has gone up.

17:31And I I know it hasn't been as much as a lot of people were fearing back in February or March or April, but I have dug into this a lot. I've read a lot of analysis about this. And basically what the consensus view is among economists and businesses that have looked into this is that the impact of tariffs are going to hit the economy slowly and steadily. It's not like there was going to be a cliff and that we would see all of the inflation from tariffs all at once. It appears this is just what's happened so far is that it's sort of dripping into the economy slowly, which means that there is still risk that inflation is going to keep going up over the next couple of months.

18:18Again, it seems unlikely that it's going to shoot up to five percent. Like I'm not saying that, but does it go up to three? Does it go up to three point five? Those seem, from the data I've seen, within the realm of possibility. And if that happens and if that inflation winds up being sticky, that's not good news for mortgage rates because the Fed can keep cutting rates and mortgage rates can stay just as high as they are. This is a matter of supply and demand. If investors fear inflation, bond yields are very unlikely to go down, and that means mortgage rates are very unlikely to go down. And so I've been advising people who have been asking me over the last couple of weeks, should I lock in now?

18:59I've been saying yes. I actually think you would. They might go down more. I absolutely think that they might go down more. But I also think that there's an almost equal chance that they go back up a little bit. And if you have a property that you're considering buying, I think you take what you can get. because right now at 6.15, 6.2, that's one of the lowest we've seen in years. And personally, I would choose to lock in a fixed rate mortgage at that rate rather than waiting to see if they go down even further because it's like it could go down to 6 % maybe, but I don't know if it's really worth waiting and not buying a property for it to go down 0.1 points.

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22:42Welcome back to the BiggerPockets podcast. I'm Dave Meyer giving you my reaction and some forecasts about mortgage rates following the Federal Reserve's cut of interest rates yesterday. Before the break, I said that the likely path with the consensus view is that mortgage rates will probably drift around where they are today, between 6 % and 6.4 % for the remainder of the year. And they may fall a little bit next year, but it really all comes down to inflation, which is unknown. Now, I see a lot of people on Instagram or even professionals saying that, you know, we're on a path to 5 % mortgage rates in the next year.

23:22And I am not convinced, to be honest. I don't think that is the most likely scenario. And, you know, I'm an analyst. I will never say that that's not going to happen. I think there is some reasonable chance that it does happen. And I just don't think that's the most likely thing to happen in the next year, because what needs to happen for mortgage rates to get down to five percent is we need to see a significant drop on the yield on 10 year U.S. treasuries. We're at about four, 4.1 percent today, they would need to go down to roughly 3%. And that might not seem like a very big change, but it actually is.

24:01That is a considerable difference. If people are going to accept 3 % interest rate on debt from the US government while inflation is at 3%, I don't really see that happening. That seems very unlikely given all the historical data we have about these things. There's basically two ways that we can get yields that low. The first is a significant recession without inflation. And so this means we would see big spikes in the unemployment rate. We would see GDP start to contract. We would probably see wages start to decline. Not good things, right? And so I know people are out there rooting for 5 % mortgages.

24:41the most likely path to a 5 % mortgage is the economy really tanking. And I'm not talking like a little bit. I think it would take a pretty significant deterioration of economic health to see those lower rates. Because as I said, what needs to happen is investors around the world need to look at the economic climate and say, my money, rather than putting in the stock market or crypto or reinvesting it into my business or investing into real estate. I'm going to put it in bonds because I'm just trying to be safe right now because the economy is so uncertain and so bad. That isn't really materializing right now.

25:22You know, we are seeing the labor markets start to crack. But with the Fed starting to cut rates, that might moderate a little bit. I do think that will take some time. I'm not super optimistic that we're going to see hiring pick up because the Fed cut rates a quarter point. I think it's going to have to be bigger than that. And I think it's going to have to be longer than that if we want hiring to really pick up. But right now, there are definitely signs of strength. There are some signs of weaknesses. It's kind of this mixed bag. But for rates to really go down on this avenue, we need to see it go pretty much all bad.

25:52And I should note that it's important that it has to be all bad without inflation, because there is a scenario where we have stagflation, where we have the economy decline. line. It's declining right now a little bit slowly, not an emergency. And we have inflation right now a little bit going up slowly, not an emergency. But if both of those things got bad at the same time, mortgage rates aren't going down. You know, a stagflationary environment or any environment where we are going to see inflation in any meaningful way, even if the economy is bad, we are very unlikely to see mortgage rates go down.