A stagnant Colorado housing market could benefit from what is expected to be a series of ongoing cuts to the federal interest rate after U.S. officials made the first reduction in more than four years.

Interest rates, which affect everything from mortgages to credit card payments, had been holding steady at a more than 20-year high in a bid to dampen consumer spending and bring down inflation. 

Now, the Federal Reserve, which controls rates, is signaling confidence that inflation is cooling enough to the point where rates can come back down. Federal Reserve officials slashed rates Wednesday by half a percentage point to just under 5%, with continuous cuts predicted over the next year. 

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“Our economy is strong overall and has made significant progress towards our goals over the past two years,” said Federal Reserve Chair Jerome Powell during a press conference. “Inflation has eased sustainably from a peak of 7% to an estimated 2.2.% as of August.” 

Should the trend continue and mortgage rates also fall, it could lower the barrier to housing for first-time homebuyers and unlock more movement in Colorado’s real estate market, industry experts say.

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“This kind of an improvement can be huge for homebuyers — it can increase their purchase power and it reduces their monthly payments,” said Athena Damianos, a High Country-based mortgage lender. 

Nationally, mortgage rates have been dropping since early 2024, down to an average 6.1% after peaking at 7.79% in late 2023, Damianos said. While interest rates don’t directly change mortgage rates, it is one the factors that impacts how high or low mortgage payments will be. 

“While the Fed rate cut does to some degree affect mortgages, it is not a direct correlation,” Damianos said. “The reality is that the Fed cut has been anticipated for several weeks now and from the mortgage perspective, our market had already baked in that anticipated cut in the rates.”

If inflation continues to drop, eventually hitting the Federal Reserve’s 2% goal, more rate cuts will ensue. Experts are already projecting an additional quarter-point cut by late 2024 or early 2025. 

“I think it is the beginning of the turning point,” Damianos said. “Over the past year, we have seen year-over-year, month-over-month data that inflation is cooling. It’s not a linear line. It is bumpy, but as it continues to soften we should anticipate more of these cuts.”

The impact of high interest rates on mortgage payments has been a critical factor for the slump in home sales. Nationwide, less than 5 million homes were sold in 2023, the lowest sales volume on record since 1995, according to data from the National Association of Realtors.

As of August, trends were expected to be similar for 2024. In Colorado, the number of home sales this year has continued to flatten, even during June and July — months that historically see the most transactions. 

In mountain resort communities that see high demand for vacation homes, the average number of days on market for a listing has increased from last year, according to county-level reports from the Realtors association. Listed properties in the state’s 2nd Congressional District — home to resort communities like Summit and Eagle counties — have seen an average increase of nearly 19%, for example. 

“In some neighborhoods we have homes that have been on the market for 10 months,” said Dana Cottrell, a mountain area Realtor and president-elect for the Colorado Association of Realtors. 

“These rate cuts are going to impact first-time homebuyers and buyers who are on a tighter margin for making properties work,” Cottrell said. “I think it could loosen up things.”

A large majority of resort market buyers who don’t have a mortgage will be unaffected since upward of half of transactions represent cash purchases, Cottrell said. Rate cuts will be most felt by first-time homebuyers and middle-income households with much tighter financial margins.

On the other side, sellers may be more freed up to buy new property. 

With the majority of homeowners locked into a fixed mortgage, those who bought before the spike would likely be locked into a rate around 3%. Because of this, some homeowners may not be willing to sell their property only to take on higher mortgage payment with a new home — a scenario real estate experts refer to as “golden handcuffs.”

“People have not been turning over their homes because they like their 3% mortgage,” Cottrell said. “But as time goes on, there’s life-altering things, whether it’s births, deaths, divorces, new jobs.”

Declining mortgage rates will help make those property transitions for current homeowners easier, Cottrell said. 

Damianos, the mortgage lender, said there is the possibility that an increased buyer pool could eventually lead to more power for sellers who, so far this year, have been widely offering concessions to buyers to offset factors like high mortgage rates and HOA fees. 

Still, any reduction in mortgage rates is a win for homebuyers. Damianos said she’s already begun to refinance mortgages for homeowners who want to access a lower rate. In one case, it saved a household $775 in monthly payments. 

But she also cautioned against refinancing too soon. Homeowners may want to wait to see what the Fed does next and wait until mortgage rates drop even further to avoid having to refinance multiple times. 

“I think we’re going to see some real changes in 2025,” Damianos said. “It’s going to take another year before we see whatever ‘new normal’ is considered.”