Housing Market Rebound On The Cards? Not So Fast.
Federal Reserve Chairman Jerome Powell’s recent comments at the annual central bankers’ gathering in Jackson Hole, Wyoming, have fueled speculation that a cut in interest rates could be on the horizon.
With inflation appearing to be under control and the job market showing signs of weakness, many in the financial world are predicting that the Fed may lower rates as early as September. This would mark the first rate cut since the post-pandemic supply chain issues sent prices soaring.
For many Americans, higher interest rates have had a significant impact, particularly when it comes to housing. The combination of elevated borrowing costs, skyrocketing home prices, and rising rents has created a severe housing affordability crisis across the country. As families struggle to keep up with these increasing costs, the possibility of lower interest rates offers a glimmer of hope. However, the reality is that the impact of a rate cut on housing affordability is far from straightforward.
On one hand, lower borrowing costs could make mortgages more affordable for buyers, potentially encouraging more construction of desperately needed homes. With the nation in the grips of a housing shortage, the prospect of more homes being built is certainly welcome. However, the immediate aftermath of a rate cut could lead to a surge in demand, as buyers rush to take advantage of cheaper financing. This sudden increase in competition could drive home prices even higher, exacerbating the very affordability issues the rate cut is intended to alleviate.
As Daryl Fairweather, chief economist at Redfin, explained to Business Insider, “A rate cut would probably result in more competition because demand would grow more than supply would.” This means that while some relief might come in the form of lower mortgage rates, it is unlikely to be enough to significantly improve housing affordability in the near term. In fact, Wells Fargo economists have predicted that while financing costs may decline modestly over the next few years, the 30-year mortgage rate is expected to remain well above the historically low levels seen as recently as 2021.
Adding to the complexity, the impact of a rate cut on home prices is expected to be immediate. With mortgages becoming slightly more affordable, demand is likely to increase, pushing home prices higher. Most major forecasts predict that home prices will be between 3.8% and 6.1% higher at the end of this year compared to last year. This pattern is already playing out in other countries, such as the United Kingdom, where home demand surged following the Bank of England’s decision to cut interest rates on August 1 for the first time in four years.
While the short-term outlook for home prices may be concerning, a rate cut could have positive long-term effects on the housing market by spurring new construction. Lower borrowing costs for acquisition and construction loans could incentivize builders to take on more projects, helping to address the housing shortage. According to Ben Metcalf, managing director of the Terner Center for Housing Innovation at UC Berkeley, even a single rate cut could make many previously unfeasible rental projects viable and enable more homebuyers to afford properties.
However, building the millions of homes needed to meet demand won’t happen overnight. Builders are currently facing a severe shortage of construction workers, as well as high costs for building materials, both of which have slowed the pace of new construction. Estimates of the housing shortage vary, with Zillow estimating a deficit of 4.5 million homes and Realtor.com putting the number at 7.2 million. While lower rates could help accelerate construction, they are not a cure-all for the housing crisis.
“It’s going to be a long time before we get enough supply out there again so that prices are dropping,” Metcalf said. “We’re way far away from that. I think we’re still just trying to dig out.” Indeed, while a rate cut might offer some short-term relief for homebuyers, the underlying issues driving the housing crisis—such as the shortage of homes and the high costs of construction—will take years to resolve.
In conclusion, while the prospect of lower interest rates might bring some hope to those struggling with housing costs, the reality is that it will likely take much more to truly address the affordability crisis. As the nation waits to see what the Federal Reserve decides, it’s clear that the road to housing affordability remains long and challenging.
