How will September’s Fed interest rate cut affect the housing market?

The Federal Reserves interest rate policy plays an important role in determining borrowing costs for consumers and businesses. So, it came as a relief on Wednesday when policymakers at the central bank decided to finally cut rates. The move was all but guaranteed but the size of the reduction had been in doubt.

In the end, the Federal Open Market Committee (FOMC) opted for a bigger 50-basis point cut, the first in an expected series before the end of the year and into 2025. While the move will help lower borrowing costs, freeing up more income to spend in the short-term, it will have little impact on the troubled housing market at this time.

How will September’s Fed interest rate cut affect the housing market?

The one of the major problems in the US housing market today is affordability. While lowering interest rates should help bring down mortgage rates, thus saving homebuyers money, the latest rate cut was already priced in.

Mortgage rates, which were over 7% for a 30Y FRM last spring, have been coming down seeing their fastest drops beginning at the end of July. The rate now sits a little over 6% for a 30-year fixed-rate mortgage.

While the Fed’s rate cut was the bigger of the two forecast, and two more are expected before the end of the year, that will most likely not push down mortgage rates. They could even tick up slightly says Redfin economist Chen Zhao.

She explains that markets had been expecting a faster pace of rate reductions prior to the meeting. However, Fed Chair Jerome Powell explained after the FOMC meeting that policymakers will most likely opt for 25-basis point cuts at each of the subsequent gatherings. The final decision each time will depend on the economic data as it comes in.

However, the Federal Reserve cannot solve the core problem in the housing market which is a lack of supply. Since the Great Recession devastated the US housing market, there have not been enough new homes being built.

This problem was exacerbated by the covid-19 pandemic. What had been a problem in certain markets was spread to every nook and cranny of the nation with the Great Migration.

Americans took advantage of ultra-low mortgage rates to refinance or switch their residence. And the shopping frenzy drove prices through the roof. Now, millions of households have mortgage rates far cheaper than they could get nowadays so they don’t want to sell, nor is there much housing available to buy.

In cruel irony for those Americans that do want to buy a home, especially first-timers, lower mortgage rates now could make it even harder and more expensive to buy a home. Without greater supply, lower mortgages would lure more buyers off the sidelines thus creating more competition.

The silver lining of mortgage rates staying elevated, even as the Fed lowers interest rates, is that it may give builders time to build more homes as the loans they get are more closely tied to interest rates. However, that construction will only help bring prices down if they build starter homes and affordable housing for which there is the biggest necessity.