Is the Federal Reserve’s interest rate cut a turning point for Colorado’s real estate market?

Colorado’s stagnant housing market could benefit from expected cuts in federal interest rates after U.S. officials delivered their first cut in more than four years.

Interest rates, which affect everything from mortgages to credit card payments, have been held steady for more than 20 years in a bid to curb consumer spending and lower inflation.

Now the Federal Reserve, which controls interest rates, is giving a signal that inflation is cooling enough for rates to fall. On Wednesday, September 18, Federal Reserve officials cut rates by half a percentage point to just under 5%.with further cuts expected next year.

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“Our economy is broadly strong and has made significant progress toward our goals over the past two years,” Federal Reserve Chairman Jerome Powell said during a news conference Wednesday. “Inflation has fallen sustainably from a peak of 7% to an estimated 2.2% in August.”

Industry experts say if this trend continues and mortgage interest rates decline, it could lower the barrier to entry for first-time homebuyers and allow for more movement into Colorado’s real estate market.

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“This type of improvement could make a huge difference for homebuyers — it could increase their purchasing power and lower their monthly payments,” said Athena Damianos, a mortgage lender with High Country.

Nationally, mortgage rates have been falling since early 2024, to an average of 6.1% after peaking at 7.79% in late 2023, Damianos said. While interest rates don’t directly change mortgage rates, it’s one factor in how high or low mortgage payments will go.

“While the Fed rate cut does affect mortgages to some extent, it’s not a direct correlation,” Damianos said. “The truth is that the Fed rate cut has been anticipated for several weeks, and from a mortgage perspective, our market has already absorbed that anticipated rate cut.”

If inflation continues to fall, eventually reaching the Federal Reserve’s 2% target, more rate cuts will follow. Experts are already predicting an additional quarter-point cut by the end of 2024 or early 2025.

“I think this is the beginning of a turning point,” Damianos said. “We’ve seen year-over-year, month-over-month data over the last year that inflation is coming down. It’s not a linear line. It’s uneven, but as it eases, we should expect more of these cuts.”

The impact of high interest rates on mortgage payments was a key factor in the decline in home sales. Fewer than 5 million homes were expected to be sold nationwide in 2023, the lowest sales volume since 1995, according to the National Association of Realtors.

In August, similar trends were expected for 2024. In Colorado, the number of home sales this year has continued to decline, even in June and July — months that historically see the most transactions.

In mountain communities with high demand for vacation homes, the average number of days a listing is on the market has increased over last year, according to county-level real estate brokerage reportsProperties listed in the state’s 2nd Congressional District — home to resort areas like Summit and Eagle counties — saw an average increase of nearly 19%.

“In some neighborhoods, we have homes that have been on the market for 10 months,” said Dana Cottrell, a mountain-area real estate agent and elected president of the Colorado Association of Realtors.

“These interest rate cuts will affect first-time homebuyers and buyers who are less likely to have a property that works out,” Cottrell said. “I think that could ease the tension.”

The vast majority of buyers in the resort market who don’t have a mortgage won’t be affected because more than half of the transactions are cash purchases, Cottrell said. The biggest hit from interest rate cuts will be first-time homebuyers and middle-income households with much tighter financial margins.

On the other hand, sellers may have more freedom to purchase new properties.

Because most homeowners are stuck with a fixed mortgage, those who bought a home before the increase would likely be stuck with a rate of around 3%. For that reason, some homeowners may be reluctant to sell their property just to take on a higher mortgage payment for a new home — a scenario real estate experts call “golden handcuffs.”.”

“People didn’t sell their homes because they liked their 3 percent mortgage,” Cottrell said. “But over time, life-changing things come up, whether it’s births, deaths, divorces, new jobs.”

Cottrell said falling mortgage interest rates would make it easier for current homeowners to flip their property.

Damianos, the mortgage lender, said there’s a chance that more buyers will ultimately translate into more selling power for sellers, who have been widely offering buyers concessions this year to compensate for factors like high mortgage interest rates and HOA fees.

Still, any reduction in mortgage rates is a win for homebuyers. Damianos said she has already started refinancing mortgages for homeowners who want to access a lower rate. In one case, a household saved $775 in monthly payments.

But she also cautioned against refinancing too early. Homeowners may want to wait to see what the Fed does and wait until mortgage rates drop even further to avoid having to refinance multiple times.

“I think we’ll see real change in 2025,” Damianos said. “It’ll be another year before we see whatever ‘new normal’ we’re considering.”