Next month, the Federal Reserve is expected to cut interest rates, which could encourage anxious homebuyers in the Des Moines metropolitan area to buy, says Shaner Magalhães, president of the Iowa Association of Realtors.
But Erika Hansen, president of the Des Moines Area Association of Realtors, expresses concern that the expected interest savings of real estate agents flooding into the market could be wiped out by the consequences of rising demand.
“This will ultimately bring more buyers back into the market, driving prices back up and inventories back down,” she said.
Will lower interest rates make homes cheaper?
On August 8, the average interest rate on a 30-year mortgage was 6.47 percent, below the 12-month high of 7.7 percent on October 26, the Federal Reserve Bank of St. Louis said.
It could fall even further next month if inflation falls “as expected,” as Federal Reserve Chairman Jerome Powell said on July 31, paving the way for the first rate cut in more than four years.
The Federal Reserve raised interest rates 11 times in 2022 and 2023. On Wednesday, the Labor Department said the consumer price index rose 2.9% from July 2023 to July 2024. While that’s still above the central bank’s 2% inflation target, it’s the lowest 12-month increase since March 2021.
Mortgage rates are not directly tied to Federal Reserve policies. However, 30-year mortgage rates tend to track 10-year Treasury yields.
According to the National Association of Realtors, home sales fell 5.4% nationwide in June, while the median home sale price rose to a record high. In the Des Moines metropolitan area, the Des Moines Area Association of Realtors also reported a record-high median home sale price of $307,000. The median for August fell to $299,000, but that’s still 10% higher than January’s $270,000.
With mortgage rates still well above 6%, many homes remain unaffordable for buyers, Magalhães said. Four couples and former clients of Magalhães in the Iowa City area would like to buy larger homes, but their purchasing power is limited by the higher rates combined with the increased interest rates, he said.
“For most people, it’s a no-brainer: the lower the interest rate, the more interest they have in pursuing something,” he said.
Scott Wendl, a real estate agent in Johnston and vice president of the National Association of Realtors, said that on a $300,000 loan, lowering the mortgage interest rate from 7% to 6% could save about $200 a month.
“For a beginner or someone on a tight budget, this is a huge win that someone else would otherwise have to spend on something else,” Wendl said.
A return to the home buying frenzy of 2021, 2022?
But Hansen fears that a drop in interest rates could lead to something like the buying frenzy during the COVID-19 pandemic in 2021 and 2022, when high demand coupled with a lack of inventory led to bidding wars. Potential buyers often had to decide immediately after viewing a home whether to make an offer or risk missing the auction.
A return to high demand and low inventory could drive up prices and give buyers less time to consider deals, Hansen said.
“I feel like while it wasn’t the case in all cases this summer, I’ve had buyers who have been able to negotiate or get the closing costs down,” Hansen said. “And they’re definitely doing inspections again and not skipping appraisals like they did three years ago.”
In May 2021, the median time sold homes in the Des Moines metropolitan area spent on the market was 43 days, the shortest time in recent memory, according to the Federal Reserve Bank of St. Louis. In June 2024, the average home sold in 50 days, the same as in July 2021.
Even as high mortgage rates dampen demand, supply is still tight, Hansen said. Across the country, homeowners who have locked in mortgage rates between 2 and 3 percent before inflation are hesitant to move.
Since 2021, newly built homes have added some new options to the Des Moines market, Hansen said. But there are still few existing homes for sale, especially those priced under $250,000, she said.
“It’s hard for that entry-level buyer to find a home. In some cases, they’re competing with investors (who are renting homes) in that price range,” Hansen said. “And if you buy and finance a home and an investor is paying cash, it’s hard for the home buyer to compete with an investor who is paying cash.”
Home selling trends in the Des Moines area
Home sales are affected by factors such as weather conditions and interest rates. Here are the annual home sales trends for Des Moines in 2024.
- January: An increase of 13.6%.
- February: Decrease of 2.9%.
- March: Decrease of 3.6%.
- April: An increase of 15.7%.
- May: An increase of 7.9%.
- June: Decrease of 12.7%.
- July: An increase of 5.3%.
Reuters contributed to this article.
Philip Joens covers retail and real estate for the Des Moines Register. Reach him at 515-284-8184, [email protected] or on Twitter at @Philip_Joens.
