Reducing interest rates alone won't be sufficient to rescue the housing market from its current predicament.
The half-percentage-point decrease brought rates down from a 23-year high they'd maintained for over a year, and the central bank hinted at more potential decreases.
Lower mortgage rates might equate to more purchasing power for homebuyers, but America's housing troubles aren't likely to be solved solely via rate decreases.
A scarcity of properties for sale, coupled with escalating expenses like homeowner's insurance and leases, have made both purchasing and leasing a home in the U.S. progressively unaffordable for many, eating up an ever-increasing portion of Americans' wages and savings.
As Shaun Donovan, a former US Secretary of Housing and Urban Development, told CNN, "This is great news, but there's a lot more we have to do to address an unprecedented housing crisis in this country."
Challenges in constructing new homes
Both Vice President Kamala Harris and former President Donald Trump have proposed methods to enhance the housing supply. This is warranted as there isn't enough inventory to keep up with demand.
"This is a persistent, gradual crisis stretching back over decades that intensified into an immediate crisis during Covid," Donovan said.
This lack of housing has been a major factor in soaring home prices. Based on data from the National Association of Realtors, the median existing-home sale price was $416,700 in August, a slight decline from the all-time high of $426,900 hit in June.
Harris unveiled a plan to construct 3 million new homes, while Trump has announced plans to cut regulations adding costs to home construction. However, Enterprise Community Partners, the nonprofit where Donovan currently serves as CEO, estimates that the U.S. requires 7 million new units to stabilize the market.
"I'm really encouraged by how much emphasis the campaigns have placed on housing," Donovan said.
The country's housing deficit even earned mention during Federal Reserve Chair Jerome Powell's press conference following the announcement of the interest rate cut.
"The genuine issue with housing is that we've had, and are on track to continue to have, insufficient housing," he said. "Where will we obtain the supply? This isn't something the Fed can truly address... the supply issue will need to be tackled by the market and also by the government."
It won't be simple. Danushka Nanayakkara-Skillington, the National Association of Home Builders' assistant vice president of forecasting and analysis, said that while the Fed's half-point rate reduction will increase the number of loan options for home builders, they nonetheless face other hurdles, such as a labor shortage, costly regulations, zoning restrictions, and more expensive construction materials.
"We still have 250,000 open positions in the construction industry," she said. "Earlier in the year, that number was around 400,000 jobs, so it has decreased as the job market has slowed down."
While Harris and Trump may pledge to construct more homes, numerous zoning laws and other regulations can only be amended at the state and local levels.
"There are many elements that have impacted the housing supply, and these are complicated problems to solve. It cannot be resolved overnight," Nanayakkara-Skillington added.
Breaking free from the 'lock-in effect'
Another reason there are fewer homes being put up for sale is that numerous Americans purchased homes or refinanced their mortgages in the years following the pandemic when rates were historically low before the Fed raised them to combat inflation. Almost 60% of the 50.8 million active mortgages have interest rates below 4%, according to the Consumer Financial Protection Bureau. Many of these homeowners have been reluctant to sell and give up their low-interest loans.
Mortgage rates have already began falling in expectation of the Fed's rate-cutting cycle. The standard 30-year fixed-rate mortgage averaged 6.09% in the week ending September 19, which is its lowest level since February 2023.
Charles Dougherty, a senior economist at Wells Fargo, predicted that the average 30-year fixed mortgage rate will drop to 5.5% by the end of 2025. That's still above the 3% mortgage rate level seen during the post-pandemic period, but substantially lower than the two-decade peak of 7.79% hit last fall.
"We're not expecting mortgage rates to drop that much further, and we still think that the mortgage rate 'lock-in' effect will remain," Dougherty said. "Although it should ease up somewhat, meaning supply will improve somewhat and possibly normalize."
Powell touched upon the 'rate lock' phenomenon last week, suggesting that more properties may soon be listed for sale.
"As rates decline, people will begin to move more, and that's probably starting to happen already," he said.
Some economists have voiced concern that homebuying demand, fueled by lower rates, could drive home prices even higher if it draws out more competition between buyers.
However, Dougherty pointed out that the recent increase in the unemployment rate could offset this demand for homes. In August, the unemployment rate stood at 4.2%, up from 3.7% in January.
"Things will probably pick up as rates decrease, but we're not anticipating a high-octane rebound," Dougherty said of the housing market. "It's just a different economic landscape now compared to when we saw things really take off after the pandemic."
Ryan McLennan, a Houston realtor, stated that he has yet to observe the substantial surge in homebuying and selling interest that one might anticipate as mortgage rates decrease.
"Partly, I believe that's due to the Fed's decision aligning with expectations, and it was already factored into the market for quite some time before the announcement," he explained. "Another major factor contributing to the lack of a surge could be the hefty expenses associated with other consumer spending areas, which are still keeping people's wallets rather thin."
Businesses involved in construction might benefit from the decrease in mortgage rates, as it could potentially lower the cost of homebuilding. However, the housing market still faces challenges like a lack of inventory, labor shortages, and expensive materials, making it difficult to construct the necessary 7 million new units required to stabilize the market.
The decrease in mortgage rates could encourage homeowners with low-interest loans to list their properties for sale, helping to increase the housing inventory. However, economists warn that increased homebuying demand fueled by lower rates could exacerbate competition and drive up home prices, especially if unemployment rates remain high.
