Waiting for the Fed to cut rates before buying a home? Experts predict no relief for buyers even if interest rates fall — here's why

A Fed rate cut doesn't necessarily mean mortgage rates will fall

The first warning for prospective homeowners hoping for a rate cut comes from Orphe Divoungu, Zillow Home Loans senior economist, speaking to Yahoo Finance.

“I think people are very excited about the prospect of the Fed cutting interest rates, but I don’t think that lower rates will translate into lower mortgage rates immediately as some expect," Divounguy said last month. "I think mortgage rates are likely already reflecting Fed expectations."

The Federal Reserve doesn't directly control mortgage rates. It controls the overnight rate at which banks borrow from each other. While this influences mortgage rates, a Fed rate cut won't necessarily send them plummeting.

Divounguy's theory is that the banks are already setting their rates with the expectation of a cut, so when it happens, they won't rush to drop them further. He also warned that if the Fed delivers fewer rate cuts than expected or none at all, we'll likely see some upward pressure on rates instead of rates going down.

"You take that and you add growing fiscal deficits, the fact that the government needs to borrow to funds its operation, means that the pressure isn't likely to abate anytime soon. We just got these Q2 GDP numbers that show the economy is pretty strong. That will likely put upward pressure on yields," he added.

He said an encouraging sign for potential homebuyers is that the housing market is rebalancing — a quarter of sellers are cutting their prices and inventory is around 20% higher from a year ago.

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A rate cut could mean skyrocketing housing prices

Would-be homeowners are facing even more dire warnings from other experts, including Pulte Capital CEO Bill Pulte and “Shark Tank” star and investor Barbara Corcoran. Both Pulte and Corcoran spoke to Fox Business earlier this year and believe that if the Fed cuts rates, property costs will skyrocket.

"If the federal reserve comes in … and reduces rates … you could see those home prices go up, in my opinion, 5, 10, 20%. That would be just insane. You would start to have a buying frenzy again, much like during COVID," Pulte said.

"If rates go down just another percentage point ... prices are going to go through the roof," she said. "Because everyone will come out and buy. There are probably 10 buyers on the sidelines waiting for interest rates to come down than are actually active in the market. So everybody’s going to charge to the market."

What should home buyers do?

Whether you're ready to buy a house depends on many factors.

For well-qualified buyers with money to put down who can afford a mortgage at today's rates, it may make sense to jump in now when demand is still constrained by high rates. If Pulte and Corcoran are correct and prices skyrocket when the Fed finally starts cutting rates, you'll gain instant equity.

It's also worth remembering that you won't necessarily be stuck with the rate you get if you buy now before rates decline. You may be able to refinance after rates fall. This approach could give you the best of all worlds — a home you bought before a price surge and a mortgage at a new and improved lower rate after your refinance goes through.