The Fed’s 0.50% rate cut on Sept. 18 was big news that will have an impact on savings accounts, borrowing costs, and many other aspects of the economy. But don’t get too excited. Most people shouldn’t be in a big hurry to make big purchases or aggressive financial moves because of the Fed rate cut.
We talked with Michael Jones, Director of Mortgage Lending at Austin, Texas-based University Federal Credit Union (UFCU) to get his take on the latest financial landscape after the Fed’s 0.50% rate cut. As a mortgage industry expert, Michael Jones believes that the economy is showing signs of weakness, and many Americans should be cautious in the aftermath of the Fed rate cut.
“This rate cut doesn’t mean the economy is getting better,” said Jones. “It’s more of a reaction to ongoing issues within the economy — especially the recent change in employment numbers showing a weaker job market.”
Here are a few money moves that you might want to hold off on making after the Fed rate cut.
1. Buying a house
With lower interest rates, many people are hoping that mortgage rates will keep coming down, too — which could make it easier for home buyers to afford a new home. But Michael Jones from UFCU believes that the Fed’s 0.50% rate cut might not be sending a strong signal that now is the right time to jump into the housing market.
“Home loan rates don’t move in lockstep with the Fed rate; they’re actually more closely tied to the 10-year Treasury yield,” Jones said. “After the recent Fed rate cut announcement, we’ve actually seen the 10-year yield rise, which means mortgage rates are likely to go up as well. Even if the Fed cuts rates again later this year, mortgage rates will still be shaped by what the bond market anticipates.”
This means that even if the Fed cuts interest rates by another 0.50% by the end of 2024, no one knows for sure if mortgage rates will come down by that same amount — if at all. Don’t assume that now is the best time to take out a mortgage based on one Fed rate cut, or even two or three more rate cuts.
Jones also sounded a note of caution on whether now is the time to buy a home. Housing prices in many cities have gone up significantly in the past few years — but there are no guarantees. Housing prices can go down as well as up.
“This could be a good moment to think about buying a home, but it’s important for consumers to be cautious as real estate is highly localized,” Michael Jones said. “For instance, in cities like Austin, we’ve seen home prices surge, but they can also drop quickly, especially with expected increases in supply by 2025.” In short, your home-buying prospects depend on your market.
2. Buying a car (with an auto loan)
Lower interest rates from the Fed may lead to lower APRs on auto loans and other personal loans. But that doesn’t mean now is the best time to buy a new car and borrow heavily to do it. Even if you can get a 0.50% lower car loan APR than you could a month ago, you need to consider the total package of costs of car ownership — including auto insurance.
“For a car specifically, the interest rate is not nearly as important as it is for a home loan,” Jones said. “The majority of a car payment is principal due to the short-term nature of the loan. People who are in the market for a car should ensure they can afford the monthly, quarterly, and annual maintenance cars require, particularly tires and insurance costs.”
3. Taking out a home equity loan or line of credit
Many Americans have seen their home values go up in recent years, generating home equity. Some people might be tempted to use lower interest rates as an occasion to tap into it with a home equity loan or home equity line of credit (HELOC). Taking cash out of your home equity can help you make home renovations, pay off higher-interest debt, or make other financial moves.
But Michael Jones says that unless you have a lot of equity in your home, be careful.
“I caution against taking out HELOCs or second liens on a home unless the homeowner has lived there pre-COVID or has a loan to value (LTV) of 70% or less,” Jones said. “Homeowners without a great deal of equity in their homes could find themselves upside-down if home values decline, or if they must sell their home quickly to meet new demands for in-person work.”
Bottom line
The Fed’s 0.50% rate cut is tentatively good news for borrowers and home buyers — but it might be too soon for most people to apply for a mortgage or auto loan. Inflation could come back, the economy could slow down, and unemployment could rise.
Instead of hurrying to make a big purchase after the 0.50% rate cut, you might want to boost your savings. “We don’t believe the economy is as strong as it seems,” Michael Jones said. “Therefore, it’s important for consumers to focus on keeping a strong financial position rather than making big purchases and using up their savings.”
