Fed Cuts Rates as Employment Softens, But Real Estate Recovery Remains Uncertain

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Following a weakening labor market, the Federal Reserve’s announcement that it will cut interest rates by 0.25% on Sept. 17 comes as welcome relief to the real estate industry, as it hopes it will trigger lower borrowing costs and stimulate homebuying and refinancing.

While low employment numbers are never good news, they have given Fed Chair Jerome Powell a legitimate reason to finally take action, as President Donald Trump has been pressuring him to do for months. 

“The fourth month of subpar employment performance signals a dramatic stall in hiring and fully supports the Fed starting rate cuts at the next meeting,” Nationwide chief economist Kathy Bostjancic said in a Sept. 5 note anticipating the cut.

The Fed last lowered rates in December, when it appeared inflation was under control. Despite the worrying employment numbers, inflation remains difficult to tame amid tariffs and could again prove to be a plot spoiler should employment numbers improve. 

Rate cuts help a struggling labor market by making borrowing costs more affordable for businesses and consumers. However, for the real estate market, the outlook is less certain, as mortgage rates have been steadily falling in anticipation of a rate cut.

“The market has really high expectations for the Fed to move quickly, and I think it’s an open question whether the Fed will in fact move that fast,” Danielle Hale, chief economist for Realtor.com, told USA Today. “That does create a situation where interest rates could go up if the Fed doesn’t meet those expectations.” 

However, Hale also noted that with rates at 6.35% before the rate cut, there had been increased interest in new mortgages; however, this could be limited due to the number of homeowners who still have mortgage rates of 4% or below.

HELOCs Could Be the Biggest Winner

The relative equilibrium between buyers and sellers might be another reason that a rate cut might not have the effect many real estate investors had been hoping for. 

According to Realtor.com’s figures, there were five to seven months of inventory nationally in August, the most in almost a decade. A 0.25-point cut might not be enough to turn inventory into sales, but it could spark a renovation boom, as HELOCs are pegged to short-term rates (unlike mortgages, which are pegged to long-term rates). Thus, HELOCs respond far more quickly to interest rate moves by the Fed. 

For investors with built-up equity, tapping a HELOC can help fund purchases for other investments or carry out repairs on current rental properties. 

The Wall Street Journal reported that big-box home repair box chain stores Home Depot and Lowe’s expect $50 billion to be unleashed on the renovation market with a rate cut. However, there are many moving parts to the renovation scenario, with material costs factoring heavily into the equation.

“The cost of the average remodel is rising quickly, due to the rising cost of materials and labor,” Marc Halpern, CEO of Foundation Mortgage, told Realtor.com. “More and more homeowners will need an extra bump in cash to cover these costs, especially for vital home repairs, such as a blown water heater or busted HVAC unit.”

Buyers Have More to Consider Than Just Interest Rates

For flippers hoping lower rates could encourage indecisive buyers to take action, it’s unclear whether there is the appetite for renters to transition into homeownership amid an uncertain economy and low employment.

As of 2024, home sales are at their lowest level since 1995, which also coincided with years of high interest rates. Additionally, about 46 million Americans are currently between the ages of 30 and 39, a prime time for homebuying.

Yet it’s a tough time for many to take on extra debt. Credit card debt is higher than it’s ever been, jumping by $27 billion in the second quarter of 2025 and now totaling $1.21 trillion, according to the Federal Reserve Bank of New York. 

Home prices have also been on a tear in recent years. NAR’s July existing home sales data showed 25 consecutive months of year-over-year price increases. July’s median price was the highest ever recorded at $422,400, despite a recent softening of the market.

According to the Atlanta Federal Reserve’s Home Ownership Affordability Monitor, the current median-priced home requires 48% of today’s median household income. The country’s median-priced principal and interest mortgage payment has more than doubled in five years, soaring from $1,043 in June 2020 to $2,361 in June 2025. Once taxes and insurance are added to that number, total monthly payments have increased from $1,564 to $3,162, outpacing wage growth in that period.

Behind the Heated Rhetoric 

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President Donald Trump has continually criticized Fed Chair Powell for not cutting the federal funds rate, which he says will drop mortgage interest rates, but it’s not that simple. In fact, the last time the Fed dropped the funds rate, mortgage rates actually increased by a point. That’s because mortgage rates are more closely aligned with the yields on 10-year U.S. Treasuries.

Traditionally, there is about a 1.5-to-2-point spread between those yields and mortgage rates. Sudden rate drops could create chaos in bond markets, causing unpredictability in rates, although a federal funds rate drop generally leads to a corresponding drop in mortgage rates. 

Former chief economist at Fannie Mae and founder of Duncanomics Doug Duncan believes that the notion of a Fed reserve rate cut being the magic pill to fix the housing market is largely wishful thinking; rather, the market will reset over time. He told Bankrate:

“There will be a gradual increase in household incomes. There will be rate declines, but they’re not going to be dramatic. Builders will continue to build, and some of [the reset] will occur because of life events—job changes, or their kids finally moving out of the basement. But that will take time.”

Final Thoughts: How Investors Can Take Advantage of the Rate Cut

One rate cut is unlikely to suddenly return us to 2021 and earlier, with flippers making fortunes, BRRRR still being an effective investment strategy, and cash flow being a realistic outcome for mortgage investors. The winners of any rate cuts will be people with equity in their homes and investments who can access it through HELOCs and other types of loans. 

That doesn’t mean they should go out and try to secure break-even or non-cash-flowing rentals; instead, they should optimize the units they have by performing upgrades and increasing rents.

If buying more rentals is a goal, using a HELOC to buy a rental for cash and then refinancing if and when rates drop further could be a strategy, but you would need to run the numbers meticulously. Owning doors speculatively in the hope of cash flowing at a later date is asking for trouble. 

Save yourself the stress, work with what you have, monitor the market, keep working and saving, look for further cuts, and live to fight another day. Real estate investing is not a sprint; it’s a marathon.