The Fed finally cut interest rates. But don’t expect a quick boost for housing
Mortgage rates have been declining for weeks on expectations that the Federal Reserve would finally cut interest rates. But even though the central bank did so Wednesday, the housing market could take considerably longer to get back to normal.
The central bank on Wednesday voted to start its highly anticipated interest rate cutting cycle with an aggressive, half-basis-point cut that brought the federal funds rate to 4.75-5.0% — a move that will help drive costs of borrowing lower across the board.
That process has already started: Last week, the 30-year fixed mortgage rate fell to 6.15%, its lowest level since September 2022 and more than a full percentage point lower than a year ago, according to data from the Mortgage Bankers Association released Wednesday.
“That is very welcome news for credit sensitive sectors of the economy like housing, manufacturing, and retailers of cars and other big-ticket consumer products, which bore the brunt of high rates,” Bill Adams, chief economist for Dallas-based Comerica Bank (CMA), said in a statement. “Those sectors are a coiled spring that will rebound as interest rates fall, sustaining the current economic expansion into 2025.”
Housing, which over the last few years has been battered by sky-high mortgage rates, low affordability, and a lack of inventory, is already beginning to see signs of renewed activity. New home sales in August jumped 14.6% to 776,000 from 677,000 in July, the fastest sales pace since February 2022, according to Mortgage Bankers Association data.
At the same time, there were almost 36% more homes for sale on a typical day in August compared with a year ago — the highest level since May 2020, Realtor.com (NWS) found. And thanks to the decline in rates, total mortgage applications surged 14.2% last week from a week earlier.
But experts warn that this will be a slow recovery.
“While rates may continue to fall as the Fed provides more guidance on its future monetary policy, the majority of the adjustment in mortgage rates appears to have already been priced in,” Ruben Gonzalez, chief economist at Keller Williams, said in a statement.
Despite a pick-up in sales, Gonzalez said they remain “sluggish,” even with declining mortgage rates and a rise in inventory — a sign that buyers remain cautious despite improved financing conditions.
“While home prices are still growing, the pace of appreciation has slowed, indicating a shift toward a more balanced market as it gradually adapts to changing conditions,” he noted.
Fed Chair Jerome Powell, during a news conference Wednesday, framed the interest rate cuts as a “recalibration” of policy, given falling inflation and rising employment risks.
As the central bank shifts its focus toward the employment side of its dual mandate after fighting inflation for years, shelter costs continue to skyrocket. The Consumer Price Index fell to 2.5% in August, a welcome sign of a cooling economy. Shelter costs, however, climbed a whopping 5.2% over the last year and 0.5% in August, accounting for more than 70% of the total 12-month increase in inflation for all items excluding food and energy, according to Bureau of Labor Statistics data.
The median sale price of a home reached $433,229 in August, according to the most recently available data from real estate site Redfin (RDFN).
But it’s not unusual for shelter costs to continue to barrel forward even as inflation in other sectors slow, according to Jason Pride, chief of investment strategy and research at private wealth management firm Glenmede.
“Shelter is one of the last remaining components running a bit hot, but it is a notoriously lagging component as it takes time for falling market rents to seep into the pool of existing leases,” Pride said in a statement. “It would be reasonable to expect shelter to join the normalization theme in time.”
Austan Goolsbee, president of the Federal Reserve Bank of Chicago, told Quartz last month that “as rates loosen, housing will be a beneficiary” — although there could be considerable lags because of the relatively new popularity of longer-term mortgage contracts.
Given the Fed’s aggressive start to its rate cutting cycle, however, analysts are expecting faster and bigger cuts in the months to come (and well into next year). That should help ease costs for Americans.
“As these rate reductions unfold, consumers and businesses will begin to feel some relief on borrowing costs,” Elizabeth Renter, senior economist at NerdWallet (NRDS), said in a statement.
“If you have existing debt at a high interest rate, now’s the time to begin watching rates across lenders,” she said. “In coming months, people who bought a car or home in the past few years may have the opportunity to refinance at a lower rate. Less interest on a car loan or mortgage means lower payments and the potential for paying off your debt sooner.”
