Could the US Interest Rate Cut Boost the Housing Market?

For buyers like Aileen in Los Angeles, stubbornly high mortgage rates are not enough to dampen enthusiasm. Even though rates are roughly double what she secured during the coronavirus pandemic, she believes waiting could be costlier.
“If I have the means to get in the market, I might as well get in now, because homes are just going to get more expensive,” she said.

The Impact of Fed Rate Cuts on Mortgages

The Federal Reserve’s decision to cut interest rates has sparked renewed hope for homebuyers. Last week, the average 30-year mortgage rate dropped to 6.35%, the lowest level in nearly a year, according to Freddie Mac. But experts caution that mortgage rates may not fall much further, since banks had already lowered them in anticipation of the Fed’s move.
As Fed Chair Jerome Powell explained, “Most analysts think it would have to be a pretty big change in rates to matter a lot for the housing sector.”

Why Mortgage Rates May Not Drop Much More

Mortgage rates don’t move in direct lockstep with Fed decisions. Instead, they are influenced by banks’ borrowing costs, inflation expectations, and investor demand. If inflation ticks higher, lenders may keep mortgage rates elevated to hedge against future uncertainty, even as the Fed signals caution.
Real estate agent Nicole Stewart of Redfin in Boise, Idaho, said many buyers are expecting a big drop but may be disappointed. “We’ve already seen the majority of what’s going to happen,” she said.

Buyers Testing the Market

Despite limited relief, the small dip in mortgage rates has encouraged some buyers to make offers. Stewart said she wrote four offers and closed three deals in a single weekend this month—far more activity than she’s seen in years.
In Boise, prospective first-time buyer Kristin Carlson said the recent drop brought her “just that much closer to pulling the trigger” on a purchase after years of renting. She hopes to buy soon, before a wave of competition enters if rates fall further.

The Affordability Crisis Persists

Even with a modest decline in mortgage rates, the US housing market remains unaffordable for many. Roughly 80% of current mortgage holders locked in rates below today’s 6.35% average, often in the 3% range during the pandemic. That makes homeowners reluctant to sell, further reducing inventory and driving up prices.
“This market is still a long way from normalizing,” said Julia Fonseca, a finance professor at the University of Illinois Urbana-Champaign.

More Than Just Mortgage Rates

For many buyers, borrowing costs are just one piece of the puzzle. Carlson noted that location, home size, and builder quality weigh just as heavily in her decision. Seasonal factors and lifestyle needs often outweigh incremental changes in mortgage rates.

Signs of Cautious Optimism

Banks see some positive momentum. Matt Vernon, head of consumer lending at Bank of America, said lower mortgage rates are providing modest relief and sparking activity.
“There’s cautious optimism that we’re headed in the right direction,” he said. “It hasn’t erased the challenges buyers face, but it’s certainly got their attention.”

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