By Chad Taylor, the Taylor-Made Team
Interest rates and the Fed are all over the headlines these days. Last Wednesday, the Fed made their third rate cut of the year. That is a welcome sight for home buyers, but remember, the Fed controls the federal funds rate, not mortgage rates directly.
The federal funds rate is simply the rate banks charge each other for short term loans to meet reserve requirements. When that rate climbs, banks often pass the higher cost of money along to consumers in the form of higher mortgage rates. It is all connected, just not in a straight line the way the headlines make it sound.
Mortgage interest rates have the biggest impact on overall housing affordability. Home prices matter, of course, but the cost of money is the real lever. This is why buyer activity jumps when rates ease and slows when rates climb. A good example was September 2023, when rates hit 7 percent for the first time in years and buyer activity almost stopped overnight. Seven percent wasn’t just a number. It was a psychological wall that froze people in their tracks.
Because rates vary based on credit score, debt to income ratio, and reserves, I hesitate to quote a universal number. But with strong credit and solid reserves, a buyer today can get around 6.25 percent. That is a good rate, and it is completely in line with historical averages. As I mentioned a couple weeks ago, the era of 4 percent mortgages is behind us. That was the outlier, not the baseline.
The National Association of Realtors expects mortgage rates to settle around 6 percent in 2026. They also predict that easing rates will bring more buyers off the sidelines and push housing inventory up by roughly 14 percent. That might sound like a surge, but remember, we are still sitting in a market that has been starved for inventory for years.
This fall, the moment rates crept closer to 6 percent, showing activity noticeably picked up. Buyers who had been sitting out for months started leaning back in. It was a good reminder that market psychology matters just as much as math.
One helpful rule to keep in mind is this. For every 1 percent drop in mortgage rates, your payment decreases by about 10 percent. That means you get roughly 10 percent more buying power. You can either enjoy a lower monthly payment at the same price point or stretch your purchase price by about 10 percent and keep the same payment. That is the power of interest rates. They are the biggest lever in housing affordability.
Rates are settling modestly, and the wild swings of the last few years are starting to calm down. In real estate, calm is usually a good thing. It gives buyers and sellers space to make smart decisions instead of emotional ones.
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