Who Wins With Rate Cuts? First-Time Home Buyers, or Wall Street Investors?

Hopeful home buyers have waited for the Feds to cut interest rates forever. Well, it feels like forever. In September 2024, Federal Reserve Chair Jerome Powell finally did it. It was the first time the Federal Reserve lowered banks’ interest rates since the stimulus days of 2020.

Anticipating a better economy, mortgage rates are starting to come down. Our economy is returning to normal, the Federal Reserve’s move suggests. That’s good for people who want to buy and sell homes.

Of course, Wall Street firms love real estate when borrowing is cheaper, too. So, who will win after an economic jump start? Ordinary home buyers and deed holders? Big business? Let’s see.   

Where Hopeful Buyers Stand: Ready to Navigate a Better Housing Market

A rate cut is the Fed’s signal that inflation is now under control. We’ve made it past the pandemic era’s financial turbulence. The economy is headed for a “soft landing” and everyone can breathe a sigh of relief.

Maybe.

Inflation numbers might be coming down to Earth — but that hasn’t happened with housing.

According to HousingWire, agents want to see mortgage interest rates drop to 5%. This will create a surge of listings, and keep real estate prices in check. Can the Fed’s new rate cut action get us there?

At the moment, interest rates are still high enough to keep many would-be buyers sidelined. And that’s not the only problem with high rates. Many deed holders just don’t want to put their homes on the market if they’d be trading in a low rate for a higher one when they buy another home. (Keep in mind that most mortgage borrowers today have been able to finance their homes at rates under 4%. Many of these deed holders refinanced their loans to jump on those low mortgage rates that existed for a time after the Covid-related lockdowns.)

Today, interest rates on 30-year mortgages are down to just over 6%.They’re a full percentage point lower than they were a year ago. So, we are seeing some progress. And interest rates are headed lower still. U.S. Federal Reserve chair Jerome Powell has said further rate cuts will continue into, and through, 2025.

Will rates ever go back down to ~3%, where they were in 2020 and 2021? Don’t count on it. The Fed chair says it’s unrealistic to expect rates to drop to the bargain-basement lows available back in 2021. 

How low can rates (realistically) go? According to National Public Radio, a senior economist at Wells Fargo said the 30-year mortgage rate could settle down to 5.5% by late 2025. That’s not the hoped-for ideal, but at least it’s close to where the agents want rates to be. Even these gradual rate drops can help new buyers get into the housing market. These cuts will also help current deed holders who’d like to sell and move. Plus, with lower borrowing costs, more home builders will get out there and build.

At the moment, some builders are waiting for more clarity around the election —  and the new housing policies to follow. Read more on deed transfers in the run-up to an election.

In short: The Fed’s interest rate cuts should boost the U.S. supply of resale homes over the coming year. And that’s good news for the future of our housing market, and those who want in.

But…

We’re Not Alone: Corporate Real Estate Investors Want In, Too  

Demand is high. Supply is low. Many renters would like to become deed holders, but where are all the properties it’ll take to house them? The big problem is the “missing middle” — or the lack of what used to be called starter homes. Smaller homes would sell like hotcakes if the prices were right for younger generations that want them. And corporate players know this.

So, although interest rate cuts could lead more people to put homes on the market, some of these homes will be snapped up by investor-buyers. As inflation cools and money gets cheaper to borrow, improved “access to capital” is motivating corporations to accumulate real estate. More on this below.

The real estate investment trusts (REITs) of Wall Street need to please their shareholders. These entities have bought and refurbished massive real estate holdings across the country. That pits companies against ordinary would-be buyers who can’t compete with big companies’ cash piles. Then the firms rent these homes out to the very people they push out of the market.

Big corporations control major portions of some of the nation’s most active rental hubs in Florida, Georgia, Texas, Colorado, North Carolina… And this is one big reason that the Fed’s rate cut won’t be a complete fix for a new generation’s housing crisis.

Will the Rich Keep Getting Richer? Rental Markets as Profit Hubs for Public Corporations

According to the S&P Global Real Estate Monitor, many major real estate markets are keeping would-be buyers in apartment leases. Their home prices combined with elevated borrowing rates continue to make deeds out of reach. Corporate investors have been able to profit richly from this reality.

Here are just a few illustrations of what S&P means:

• Invitation homes said late last year that it’s looking for more homes to snap up. Interest rate cuts are here, so watch for the company to take advantage of more sales, and more availability. Last year, the group bought up more than a billion dollars’ worth of home deeds. 

• The financial powerhouse Blackstone recently bought an investment fund, Apartment Income REIT (AIR), for $10 billion. It’s made up of homes peppered across ten states and Washington, DC. “Apartment Income REIT Corp’s portfolio comprises 77 communities totaling 27,385 apartment homes,” Blackstone says. The fund focuses on “driving organic growth, as well as making possible the opportunity for excess returns for properties new to AIR’s platform.”

Need we continue? Dozens of corporations, private and public, are buying real estate. Renters, to them, are a business opportunity. If anybody needs support from their government, it’s the ordinary people who struggle to acquire the deeds to their own homes. Not the people who think renting is a perpetual profit machine.