The projected interest rate reduction by the Federal Reserve in September is not expected to remedy the housing affordability dilemma, according to economist Nick Villa from Moody’s. In a report released recently, Villa stated that while the bond market has factored in a rate cut, this alone will not bring stability to the erratic housing sector. Although lower mortgage rates could provide some respite, an ongoing increase in unemployment will likely mean fewer individuals have the means to purchase homes.
Additionally, current mortgage rates are still above the target mark of around or below 6%, which caps their potential influence on market dynamics. Over the past two years, the Fed’s rate hikes have significantly increased mortgage rates from their lows during the pandemic. Although there has been a recent dip, with rates hitting a 52-week low of 6.34% before rising again to 6.52%, the overall economic consequences for homebuyers remain considerable.
Home prices remain high, despite a deceleration in price growth. Villa indicated that the gap between renting and owning—a trend that historically favored renting—has now reversed.
Limited effects of rate cuts on housing
Even with the possibility of lower mortgage rates, renting may still be more economical for many unless rates drop below 5.25%, given the current average home prices. The fundamental issue persists: supply. Two key elements, the lock-in effect and years of insufficient construction, play a role in the existing housing deficit.
The lock-in effect occurs when homeowners with favorable low-rate mortgages hesitate to sell, fearing they would lose their advantageous terms, thus limiting market inventory. Additionally, the long-standing decline in new constructions has produced an estimated shortage of at least 1.9 million homes since the Global Financial Crisis. While new builds continue at a robust pace, these actions, combined with interest rate reductions, will not fully rectify the problem.
Fed Chair Jerome Powell recognized the structural difficulties in the market, stating, “Challenges related to low-rate mortgages and high rates will diminish as the economy stabilizes and rates adjust. However, we will still face a national housing market constrained by a shortage of homes.”
In summary, while a rate cut by the Fed in September may offer some relief, it will not be a complete solution to the housing crisis. The persistent issues of supply limitations and economic instability are likely to continue presenting challenges in the near future.
