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2024Issue9 BuildersOutlook

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MORTGAGE NEWS

4 ways Federal Reserve ' s rate cut could change housing market

After months of anticipation , the Federal Reserve cut interest rates by half a percentage point .

That will have an impact on the housing market — but it ' s unlikely to make a huge difference for those struggling to afford a home . Let ' s take a look . Mortgage rates might not actually drop much further right now

Mortgage rates have been pretty high for the last couple of years , especially compared with the historic lows they reached during the peak of the COVID- 19 pandemic .

Rates bottomed out below 3 % for a 30-year fixed-rate mortgage during 2020 and 2021 when the pandemic led to lockdowns , but they then climbed to nearly 8 % last year amid a robust economy and rising inflation .

But the prospect of rate cuts has already helped send mortgage rates lower , even before the Fed announced its actual decision on Wednesday . Long-term fixed-rate mortgage rates are now at 6.2 %, the lowest since February 2023 . ( It ' s worth noting , though , that other factors besides the Federal Reserve ' s benchmark interest rate influence mortgage rates , including economic conditions .)

This means effectively that the rate cut announced by the Federal Reserve may already be priced in — though mortgage rates are bound to fall a little more given that policymakers have made clear they intend to continue cutting interest rates into next year .

Charlie Dougherty , a senior economist at Wells Fargo , expects mortgage rates to drop " marginally " after the Fed ' s rate cut on Wednesday .

He and his colleagues forecast that the average rate on a 30-year fixedrate mortgage will be about 6.2 % by the end of this year — where it is now .

But Dougherty expects the 30-year mortgage rate to fall closer to 5.5 % by the end of 2025 , still above prepandemic levels .

Lower mortgage rates could actually mean higher housing prices Here ' s the thing : Lower mortgage rates may not make it easier to buy a home . In fact , it could make it more difficult and lead to higher home prices .

That ' s because lower mortgages are likely to lure more buyers back to the market , bringing in more competition for a limited supply of houses .

That ' s tough for first-time homebuyers . Kim Kronenberger , a real estate agent in the Denver area , says she worries for the would-be homebuyers who keep waiting for affordability to improve .

These buyers have struggled to find their first home as many were scared off by bidding wars during the lowinterest-rate era — and then were rebuffed by high mortgage rates and still-high prices .

" A lot of those buyers , they absolutely have regret ," she says of people who didn ' t buy a home at the start of the pandemic , when rates were low but home prices hadn ' t yet skyrocketed . " Because had they bought four years ago , they would have been in a whole different place than they are now ."

Don Payne , a real estate agent in Columbus , Ohio , says there ' s more inventory of larger homes for homebuyers trading up : " Builders are building them , and existing homeowners have those too ."

The big problem is a lack of starter homes .

" Folks are trying to get their first house , and there ' s a huge shortage on that ," he says .

Dropping interest rates could lead to more housing supply

A key reason for high home prices currently is the lack of housing supply : The U . S . is short millions of housing units . Supply has not kept pace with demand , especially as the large millennial generation is forming households and trying to buy homes .

High interest rates didn ' t help , making it harder for some homebuilders to get projects off the ground , especially smaller , private developers . That ' s because the rates on loans that builders get for acquisition , development and construction are closely tied to the rate set by the Fed .

So this rate cut should make it easier for those developers to get building again .

The fact that lower mortgage rates are expected to spur more homebuyers to buy will also serve as an incentive for builders to get building .

That ' s good news for the supply side of the housing equation — more homes getting built and into the market will relieve some of the demand that pushes up prices . But , of course , it will take time for those homes to be completed .

Affordability will still be a big problem

Lower mortgage rates can certainly bring down a homebuyer ' s monthly mortgage payment . But when home

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prices are sky-high , it will still be hard for many people to find a home they can afford .

Dougherty , the Wells Fargo economist , says home prices have risen by about 50 % since early 2020 , faster than average household income growth during that time .

" That has been a really big driver in terms of making housing out of reach for a lot of prospective buyers ," he says .

During the pandemic , a huge number of homeowners refinanced their mortgages to take advantage of recordlow rates . Nearly 60 % of active mortgages now have rates below 4 % — rates so low that those homeowners are unlikely to refinance again .

In other words : It will take more than the Fed ' s rate cut to fix America ' s housing problems .

SOURCE : NPR

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