Yesterday’s interest rate cut could have psychological impact on homebuyers

​​​Yesterday, the Federal Reserve announced that it had cut its key interest rate by a quarter-point to a range of 2 to 2.25 percent. This marked the first time the central bank had reduced its benchmark rate since December 2008.

I asked Real Estate Center Chief Economist Dr. Jim Gaines what impact this could have on the housing market. He said it will more than likely have little immediate influence.

"The long-term residential fixed interest rate is not directly tied to the Fed Funds Rate," Gaines said, "but is influenced more by the ten-year Treasury Bond rate, which in turn is more influenced by inflationary expectations.

"Core personal consumption expenditure (PCE) inflation is currently running well below 2 percent, and the financial markets appear to not expect any significant inflation in the near term."

If anything, Gaines said, the major impact of the Fed’s cut could be psychological.

"Buyers and sellers may now expect even lower rates and act accordingly," he said. "Indeed, current mortgage rates have been declining, so purchasing power of buyers is greater. There’s also the demand to refinance an older, higher-interest-rate loan."