In September, a rate cut seems almost certain. However, it may not be enough to address the housing crisis in the United States. The economic market remains unstable, with the impact of lowering mortgage rates diminishing if the unemployment rate continues to rise. If people are not working and earning money, it becomes difficult for them to buy houses.
Moreover, the mortgage rates have not yet reached the magical number of around 6% or below 6%, so this may not be sufficient to bring back all the observers into the market. Regardless, it is important to note that the federal funds rate is at a high level in over twenty years, which also affects borrowing costs.
Key uncertainties exist currently, and even with a rate cut, it may not immediately solve the issue of insufficient housing to meet the demand in the market.
According to a report by *Fortune*, economists at Moody explained that the bond market has already factored in the impact of a rate cut, whether it’s a half percentage point or a quarter. The average rate for 30-year fixed-rate mortgages is related to the 10-year Treasury yield, which has dropped to around 3.7%, the lowest level since May 2023. Fixed-rate mortgages and government bond yields often go hand in hand, like wine and cheese. However, the effects on the real estate market are still uncertain.
In essence, the Federal Reserve’s rate cut is aimed at stimulating the economy to increase lending. If the central bank waits too long, some fear the economy may experience a hard landing; if the rate cut is too quick, others worry about a resurgence in inflation. Both scenarios are unfavorable for the housing market.
Economist Nick Villa stated, “Even if the first rate cut of this easing cycle may happen in September, the federal funds rate will remain in a restrictive area, requiring further cuts to help the real estate market return to a more balanced state.”
Villa believes that while a rate cut will certainly help, based on the median existing home prices as of June 2024, a decrease of 0.25% to 0.5% in the 30-year fixed-rate mortgage rates is not enough to turn the situation around, particularly as rental prices continue to rise.
In a nutshell, for a home at a median price, 30-year fixed-rate mortgage rates need to drop below 5.25% to truly improve the housing market. (*latest data shows the median existing home sales price as of June was $426,900; the median new home sales price was $417,300*).
Insufficient supply is also a primary factor contributing to the housing crisis. Factors influencing supply mainly include the locking effect and years of inadequate construction leading to a shortage of homes.
According to data from the National Association of Realtors (NAR), existing home sales in June this year decreased by 5.4% annually. Compared to June 2023, this figure has slightly declined, when existing home sales dropped by 19.3%.
The locking effect is a temporary phenomenon where, due to rapidly rising rates, anyone who previously locked in at low rates is hesitant to sell and give it up. Fortunately, the current supply is higher than two years ago. NAR data shows that in January 2022, there was only a 1.6-month supply of homes, while in June this year, there was a 4.1-month supply.
Additionally, Villa noted, “While lower mortgage rates present a possibility of releasing more supply, ultimately, the U.S. faces a structural housing deficit that requires continued construction of more homes.” Since the global financial crisis, construction shortages have led to an estimated shortage of at least 1.9 million homes.
There are various estimates of the number of homes the U.S. is lacking, all in the millions. Moody states that more homes were built last year, and this year is expected to be another strong year, but this alongside a rate cut may still not be enough to solve all the issues.
Federal Reserve Chairman Powell himself has also stated similar sentiments: “Issues related to low-rate mortgages (locking in) and high (mortgage) rates, as the economy normalizes and rates normalize, these problems will ease,” he said in early March, “but a housing shortage still exists nationwide.”