Interest rate cuts at the Federal Reserve will not quickly boost the housing market

Mortgage rates have been falling for weeks on expectations that the Federal Reserve will finally cut interest rates. But even if the central bank did so on Wednesday, the housing market could take much longer to return to normal.

Central bank on Wednesday voted to begin the much-anticipated cycle of interest rate cuts with an aggressive half-basis-point cut that brought the federal funds rate to 4.75-5.0 percent — a move that will help lower borrowing costs across the board.

The process has already begun: Last week, 30-year fixed mortgage rate drops to 6.15%the lowest level since September 2022 and more than a percentage point lower than a year ago, according to data from the Mortgage Bankers Association released Wednesday.

“This is very welcome news for credit-sensitive economic sectors such as housing, manufacturing and auto and consumer goods retailers, which have borne the brunt of the high rates,” Bill Adams, chief economist at Comerica Bank of Dallas. (shirt), said in a statement. “Those sectors are a spiraling arc that will recover as interest rates fall, supporting the current economic expansion through 2025.”

Homes, which in recent years have been affected by abnormal mortgage rates, low accessibilityand lack of inventory, is already beginning to see signs of renewed activity. New home sales in August rose 14.6% to 776,000 from 677,000 in July, the fastest pace of sales since February 2022, according to the Mortgage Bankers Association DATA.

At the same time, they existed almost 36% more homes for sale on a typical day in August compared to a year ago — highest since May 2020, Realtor.com (NWS) found. And thanks to falling rates, total mortgage applications rose 14.2% last week from the week before.

But experts warn that this will be a slow recovery.

“While rates may continue to decline as the Fed provides more guidance on its future monetary policy, most of the adjustment in mortgage rates appears to have already been priced in,” Ruben Gonzalez, chief economist at Keller Williams, said in a note communicated.

Despite an uptick in sales, Gonzalez said they remain “slow,” even with falling mortgage rates and a rise in inventory — a sign that buyers remain cautious despite improved financing conditions.

“While home prices are still rising, the pace of appreciation has slowed, indicating a shift to a more balanced market as it gradually adjusts to changing conditions,” he noted.

Fed Chairman Jerome Powell, during a news conference on Wednesday, framed the interest rate cuts as a “recalibration” of policy given falling inflation and rising employment risks.

As the central bank shifts focus to the employment side of its dual mandate after years of battling inflation, shelter costs continue to skyrocket. The consumer price index fell to 2.5 percent in August, a welcome sign of a cooling economy. Housing costs, however, rose by 5.2% over the past year and 0.5 percent in August, accounting for more than 70 percent of the total 12-month increase in inflation for all items except food and energy, according to the Bureau of Labor Statistics DATA.

The median home sales price reached $433,229 in August, according to the most recent data available from real estate website Redfin (RDFN).

But it’s not unusual for shelter costs to continue to rise even as inflation in other sectors slows, according to Jason Pride, head of investment strategy and research at private wealth management firm Glenmede.

“Housing is one of the last components left to be somewhat hot, but it is a delayed component as it takes time for the decline in market rents to seep into the pool of existing leases,” Pride said in a statement . “It would be reasonable to expect the shelter to join the theme of normalization over time.”

Austan Goolsbee, president of the Federal Reserve Bank of Chicago, told Quartz last month that “As rates ease, housing will be a beneficiary” — although there could be considerable delays due to the relatively new popularity of long-term mortgages.

However, given the Fed’s aggressive start to its rate cut cycle, analysts expect faster and deeper cuts in the coming months (and into next year). This should help keep costs down for Americans.

“As these rate cuts play out, consumers and businesses will begin to feel some relief in borrowing costs,” Elizabeth Renter, senior economist at NerdWallet (NRDS), said in a statement.

“If you have existing debt at a high interest rate, now is the time to start chasing rates from lenders,” she said. “In the coming months, people who have bought a car or a house in recent years may have the opportunity refinance at a lower rate. Less interest on a car loan or mortgage means lower payments and the potential to pay off your debt faster.”