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After much anticipation, The Federal Reserve announced last month that it is cutting interest rates by half a percentage point.
The cut is expected to impact the housing market, as the Fed’s key interest rate is one of several factors that influence mortgage rates.
Until early 2022, borrowers reaped the benefits of historically low interest rates. This allowed Americans to lock in an average mortgage interest rate of just under 3 percent in 2021 — a record low. In the last few years, that rate has sharply risen to an average 30-year fixed rate of 6.8 percent in 2023.
Today, that rate has lowered to around 6.2 percent.
There are a lot of questions around how much impact the Fed’s rate cut will have on the slow housing market and those struggling to buy a new home.
Let’s look at what experts are saying the cut may or may not mean.
Lower monthly mortgage rates?
Economist experts say it’s tough to predict what will happen to mortgage rates based on this rate cut due to the complexity and interplay of various economic factors that influence them.
Looking at historical examples of past rate cuts of this size, a cut the Fed made in September 2007 led to a .2 percent drop in mortgage rates over six weeks, while mortgage rates actually rose in the months following a large cut made in July 1990, according to data compiled by the National Association Realtors.
Experts believe that the prospects of a rate cut, along with other improving economic factors, have already helped send mortgage rates lower, even before the Fed announced its actual decision.
This effectively means that the rate cut has already been baked into the mortgage rates and that a large drop is unlikely to follow.
Charlie Dougherty, a senior economist at Wells Fargo, told NPR he expects mortgage rates to drop "marginally" after the Fed's rate cut.
He and his colleagues forecast that the average rate on a 30-year fixed-rate mortgage will be about 6.2% by the end of this year — where it is now.
But Dougherty also told NPR that he expects the 30-year mortgage rate to fall closer to 5.5% by the end of 2025, still above pre-pandemic levels.
What does this mean for movement in the housing market?
Experts believe the mortgage rates will have a loosening effect on the housing market, which has been in a bit of gridlock the past few years due to inflated mortgage rates.
There is a swelling demand among homebuyers who have been on the sidelines waiting for rates to drop before purchasing their next home.
However, experts caution that changes to the current borrowing rate may not reignite the housing market due to what’s called a “lock-in effect.”
Despite the drops, mortgage rates remain much higher than the rates enjoyed by most current homeowners, who may be reluctant to put their homes on the market and risk a much higher rate on their next mortgage.
In turn, the market could continue to suffer from a lack of supply, making options limited and prices sticky.
Experts note, however, that the rate drop could lead homeowners who purchased in the past two to three years to sell and take on a lower rate on their next home.
Could lower mortgage rates lead to higher home prices?
Another possibility to consider as mortgage rate drops reshuffle the housing market: Lower mortgage rates will pull more potential buyers back into the market, increasing competition on a low supply of housing and potentially driving up costs.
Maggie Kent, a real estate agent at CORE and sales at Eastlight Condominiums in New York, told CNBC that drops in borrowing rates will be offset by higher home prices.
“If mortgage rates drop below 6%, it’s likely to increase demand for homes, which could push prices higher,” in the next year, Kent said. She believes there could be a “modest” median home price increase of 3% or 4%.
In other words, it may take a while for the Fed’s rate cut to make purchasing a home more affordable for most Americans.
"Home prices are still at record highs, and inventory remains below pre-pandemic levels," Greg McBride, chief financial analyst at Bankrate.com, told NPR. "Neither of those variables are likely to improve dramatically in the near term."
Will housing supply rise as borrowing rates fall?
The rate set by the Fed has been a key driver in the lack of housing supply, as it is closely tied to the loans that homebuilders receive for acquisition, development, and construction.
This has made it harder for developers to get projects off the ground. In Connecticut, experts say a lack of supply has been especially hindering.
Senator Chris Murphy said at a town hall in July 2023 that Connecticut has “the tightest housing supply in the nation.” This has led advocates to push for ways to address what many call a “housing crisis” in the state.
If more homebuyers get into the market as a result of the rate cuts, that could incentivize homebuilders and lead to an increase in supply, though it will take a while for any new construction to make a difference.
Conclusion
There are a lot of interplaying factors at play with the current housing market dynamics.
This recent rate cut is likely to have a domino effect of some magnitude on many of them — mortgage rates, interest among buyers and sellers, housing supply and demand, home prices, etc.
Given that it’s impossible to predict what effect these changes will have in the coming years, it's likely best for potential buyers and sellers to be patient and take any changes in stride, as it could take a while for the rate cut to have a positive trickle-down effect in the housing market. A skilled real estate agent can help advise you on your best options based on your situation.
