Fed's interest rate cuts give Chicagoans a boost, some jump to refinance while others look to buy

The Federal Reserve cut interest rates this month for the first time in more than four years — a move that will help lower borrowing costs for consumers and businesses. And while any cost-savings could take several months and even years to fully kick in, some Chicagoans are already feeling relieved and looking to refinance or purchase a home.

“When we bought, it was always our intention to, really, as soon as it made sense, make the move, refinance,” Ian Rempel said. “I was watching the rates come down in anticipation of the Fed cutting. … once it all got official, I was like, ‘Okay, I just need to actually make this call and start getting this going.'"

Rempel purchased a home in Berwyn about three years ago — right before interest rates skyrocketed during the pandemic. His family moved to Riverside in February before his daughter was about to start kindergarten to be near a “school system that we were excited about.”

But moving also meant the family had to say goodbye to their 2%-range interest rate for one at 7.5%. Once Rempel saw the Fed announce a larger-than-usual half-point cut to its key interest rate on Sept. 18, he called a mortgage consultant. He hopes to refinance and lower his monthly payments.

Mortgage rates are influenced by several factors, including how the bond market reacts to the Fed’s interest rate policy decisions. So while the Fed doesn't set mortgage rates, its policy clears a path for rates to go lower. And even a modest drop can save homeowners and potential buyers a significant amount of money.

Fall is typically a slow time for the housing market as children are back in school and the holiday season starts. This year could be different as the Fed's rate cut — and plans to implement more cuts later this year — could bring buyers off the sideline and into a market that's seeing a years-long inventory drought. Still, if you're on the fence about buying, experts said now might be a good time to act.

“The situation is right for more [home] purchases,” Jody Gerut, mortgage consultant at Prosperity Home Mortgage, said, especially for first-time buyers who can take advantage of additional grants and incentives. “I don't think that people are benefited at all by waiting, because there's no certainty in the future by waiting.”

Seeing green

The Fed's lowered its key interest rate to roughly 4.8%, down from a two-decade high of 5.3%, where it had stood for 14 months as it struggled to curb the worst inflation streak in 40 years. Inflation has tumbled from a peak of 9.1% in mid-2022 to a three-year low of 2.5% in August, not far above the Fed’s 2% target.

The Fed’s policymakers also signaled that they expect to cut their key rate by an additional half-point in their final two meetings this year, in November and December. And they envision four more rate cuts in 2025 and two in 2026.

In a statement, the central bank said it has "gained greater confidence that inflation is moving sustainably toward 2%, and judges that the risks to achieving its employment and inflation goals are roughly in balance."

Many economists like Scott Anderson, BMO's chief U.S. economist and managing director, were forecasting a more conservative quarter-point cut.

The lower rate could open a lot of doors for consumers — and businesses. Banks will pass on the lower interest to customers almost immediately, Anderson said, which will impact mortgages and high-interest credit cards. He said other loan rates should respond "fairly quickly," benefiting businesses that are seeking loans.

“We've definitely seen easing of financial conditions, and it should help homebuyer affordability going forward,” Anderson said.

The Fed's actions also kick off a period of expected easing in monetary policy, according to a report from PNC's Chief Economist Gus Faucher.

The Pittsburgh-based bank had also expected a quarter-point cut. The larger reduction shows the Fed is now focused on promoting stronger economic growth to prevent further softening in the job market, Faucher said.

Tired of waiting

Even a small shift in mortgage rates is encouraging for homeowners like Rempel, who are locked-in at higher rates. Dan Matas, vice president of mortgage lending at Mutual of Omaha Mortgage in Lombard, said those who have a high rate and refinance now, if the interest is lower, could save a couple hundred dollars a month.

“I think [homeowners] are willing to do it, knowing that these rates will go down again and then maybe we can refinance them again,” Matas said.

The average rate on a 30-year mortgage fell to its lowest level in two years for the week ending Thursday, according to Freddie Mac. It declined to 6.08%, from 6.09% last week. A year ago, the rate averaged 7.31%.

The average 15-year fixed-rate mortgages, popular with homeowners seeking to refinance, increased slightly to 5.16%, from 5.15% for the week ending Sept. 19. A year ago, it averaged 6.72%, Freddie Mac said.

Rempel said he's considering an adjustable mortgage rate — something he “never considered in the past" — since more rate cuts are projected this year.

“The changes that have already happened are significant enough for us to be like, 'We're not going to wait any longer; we’re just going to jump on this now,’ ” Rempel said. “If we need to refinance again next summer, great. We’ll do it then, too. I'm just tired of waiting.”

Ready to start buying

Moe Duric, a Realtor at Baird & Warner’s Schaumburg office, is in the same shoes as his clients: There are not enough homes on the market. Now, the Fed’s cut will make it more difficult.

Duric is looking to buy his second home in DuPage County, including towns like Addison, Villa Park and Lombard. He was casually looking for the past six months but started in August to seriously search for a home.

“I see it from my clients’ perspective now, where it's just very, very low inventory,” Duric said. “The stuff that's been on the market 30, 60, 90 days, you more or less kind of just don't even look at that because everybody knows there's a reason why it's on the market.”

Inventory of single-family homes in Chicago, including suburbs, was down nearly 12% in August compared to the same month last year, according to the Institute for Housing Studies at DePaul University.

Data from Illinois Realtors reported inventory of single-family homes in the Chicago metro area was up nearly 7% year-over-year in August and sales volume was down 6% in August compared to August 2023. The median sales price was pushed up to $355,000.

Anderson, of BMO, thinks demand will pick up fast. There’s been a lot of people on the sidelines waiting for interest rates to drop, he said.

He predicts it could be another six months to a year before more new and existing homes become available for buyers. It could force home prices up if demand outstrips the housing supply.

“I do think a lot of folks have locked in low mortgage rates throughout the pandemic,” he said. “Rates will have to move quite a bit lower than they are today to get more of those sellers to think about moving.”

An age-old adage in real estate is “marry the house, date the rate.” Duric doesn’t buy into the phrase but cautions potential buyers not to put too much stock into forecasts that interest rates will drop further this year.

“I never want my people to buy something on the premise of, ‘It's going to change,’ ” Duric said. “Let's just make sure that whatever you get today, you're comfortable making the payments for the next couple years — or longer, if you need to.”