In the Bay Area, including metropolitan regions like San Francisco and San Jose, experts predict that these areas will see the least benefit from lower mortgage rates, according to a recent study from the National Association of Realtors (NAR). The Federal Reserve made a noteworthy decision in September to cut its benchmark interest rate by half a percentage point—the largest cut in four years. Additional reductions may follow before the end of the year and into 2025.

The study highlights that San Francisco and the San Jose-Sunnyvale region, which encompasses San Mateo and Santa Clara, are likely to experience less than a 4% increase in housing affordability due to several factors. Limited housing availability, high down payment requirements, and a lower sensitivity to interest rate changes among high-income earners may all diminish the impact of these rate cuts.

Here are five key considerations for homebuyers as the Federal Reserve’s interest rate cuts take effect:

1. Lower Mortgage Rates
Reduced rates could lead to lower monthly mortgage payments or allow buyers to afford more expensive homes. However, mortgage rates had already factored in the anticipated decrease before the Fed’s decision, meaning any further drops may be smaller than expected. Buyers waiting for significantly lower rates might find themselves priced out of the market as housing demand rebounds and prices climb.

2. More Accessible Lending Criteria
As mortgage rates decline, lower monthly interest payments reduce the overall payment amount. This shift can help more borrowers meet lenders’ debt-to-income (DTI) requirements, allowing access to mortgages that might have been unaffordable at higher rates.

3. Increased Housing Demand
Lower mortgage rates decrease borrowing costs and enhance purchasing power, potentially leading to a surge in housing demand. However, in areas with limited inventory, this uptick could escalate competition among buyers, ultimately driving prices higher.

4. Housing Affordability
Mortgage expenses are primarily influenced by home prices and interest rates. While home prices establish the loan’s principal, mortgage rates dictate the interest on that principal. A recent NAR analysis illustrates that reducing mortgage rates can more swiftly improve housing affordability than lowering home prices; for example, a 1% drop in rates equates to the same monthly mortgage savings as a 10% decrease in home prices.

5. Increased Housing Inventory
Lower mortgage rates could give buyers across various income levels access to a wider selection of homes. Anticipations of further rate decreases may also motivate homeowners to sell, boosting housing inventory. Additionally, the Fed’s rate cuts may positively affect the construction industry, making it easier for developers to secure financing for new projects and increase residential builds.

However, in high-demand areas like Silicon Valley, the inverse relationship between interest rates and home prices means that lower mortgage rates may not necessarily translate to better prices for buyers. As noted, increased demand spurred by lower rates can lead to higher prices that may ultimately counteract the benefits of those lower rates.