What an interest rate cut could mean for CT real estate market

With prospective Connecticut homebuyers already seeing the biggest discounting in five years by one measure, they got another, long-anticipated break on Wednesday with the Federal Reserve cutting interest rates, dropping the cost of new mortgages and allowing recent borrowers to consider refinancing their existing loans.

The Fed announced it is cutting the federal funds rate a half-percentage point to a range of between 4.75 percent and 5 percent, despite the Federal Open Market Committee deeming interest rates still "somewhat elevated" in the words of a Wednesday afternoon press release. Stocks rose slightly after the announcement, with the move having been expected but with some analysts having predicted a smaller reduction.

"We'll be looking at the way the economy reacts," said Jerome Powell, chairman of the Fed, during a Wednesday afternoon press conference. "We made a good, strong start to this."

At the 5.25 percent to 5.5 percent range that has been in place since July 2023, the federal funds rate had been at its highest level since the summer of 2006 when the Fed sought to cool down the boom residential lending market that sparked the Great Recession of 2009.

This time around, it has been overall inflation from food to the cost of energy that has been the sticking point for the economy, with the Fed having raised rates 10 times since March 2022 in an effort to rein in runaway inflation. The U.S. Bureau of Labor Statistics calculated the August Consumer Price Index at 2.5 percent above the index reading for August 2023, still ahead of the Fed's target of 2 percent annualized inflation.

Whether the Fed rate cut has any immediate impact on the market will not be known for at least a few weeks as buyers and sellers reassess their prior assumptions on interest rates and the cost of any new mortgages.

"We're hoping that it moves the needle a little bit," said Steve Guagliano, co-owner of Family Realty Group in Newtown. "We have more inventory now than what we had a year ago -- that's normally an indicator of prices softening, but we'll see. If that trend keeps upticking, it's going to affect the market."

Buyers have been waiting for more houses to hit the market statewide, with some cities and towns seeing increases but others still in waiting mode. As of August, there were nearly 9,700 houses and condos listed for sale in Connecticut, as tracked by Redfin, close to 1,000 fewer than in August 2023. That was a comparatively mild drop compared to each of the previous two Augusts, when real estate listings were off more than 24 percent from 12 months prior.

Demand also appears to be cooling by one Redfin measure, with just over 22 percent of Connecticut sellers dropping their prices in August, up from 15.8 percent of those who did so a year earlier. That was the highest mark since October 2019.

Two weeks ago, Fannie Mae and Pulsenomics reported that experts are projecting a 3.1 percent increase in home prices next year, down from 4.7 percent this year and 6 percent in 2023.

The chief economist for the National Association of Realtors stated Wednesday on social media that mortgage lenders have already been lowering interest rates in anticipation of an eventual move by the Fed, and that he expects at least a half-dozen more rate cuts through next year.

"Due to the already low mortgage rates compared to spring, the purchasing power for home buyers has been lifted by around $50,000 for those with a $2,000 monthly mortgage payment budget," stated Lawrence Yun, chief economist for NAR. "Consumers who were priced out due to earlier higher mortgage rates could now be back in the market."

Powell said he does not expect any instant relief for renters who are paying out far more today as a result of hefty lease renewals, with any easing in apartment prices likely to take years in his view.

"The leases that are rolling over are not coming down as much," Powell said. "It's been slower than we expected -- I think we now understand that it's going to take some time for those lower-market rents."