The Fed Cut Rates. But Will That Lower Home Prices?

Rate Relief

Last week, the Federal Reserve cut its federal funds rate for the first time in more than four years. For anyone in the market to buy a home, this was an important development as the Fed’s key interest rate is a driver for mortgage rates.

So will this mean America’s red hot housing market is finally going to get more affordable?

Unaffordability Drivers

It’s not quite as simple. While average mortgage rates have already come down from their recent peaks, making the financing side of buying or owning a home more affordable, there are other factors to consider.

Most importantly, the U.S. doesn’t have enough homes to feed the demand from buyers. The housing stock is simply too low. That’s keeping home prices high across the board.

Making matters worse, in the past few years existing homeowners were disincentivized to sell their homes (for example to downsize after their kids moved out) because the high rate environment meant a new mortgage on a smaller place could be pricey. This dynamic kept sellers out of the market too.

Reality Check

As long as America’s housing shortage continues, home prices could remain elevated. Lower mortgage rates could even motivate more people to try to buy, spurring more demand, which could push up prices (a phenomenon that many homebuyers experienced during the first half of the pandemic).

The housing market is a complicated beast with a lot of dynamics at play at once. That said, at least one part of the homebuying equation stands to get some relief: mortgage costs.

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