Last week, after months of anticipation, the Federal Reserve cut interest rates by half a percentage point. Although the rate reduction was already “priced into” the markets, Orion’s brokers should know that it will have an impact on the housing market. But they also know that it's unlikely to make a huge difference on home affordability. Brokers know that the Federal Reserve does not set mortgage rates, but instead is focused on the stability of the banking system in the United States, so let’s take a look at mortgages.

‍

The general belief is that mortgage rates might not actually drop much further right now. Rates have been pretty high for the last couple of years compared with the historic lows they reached during the peak of the COVID-19 pandemic. Mortgage rates dropped below 3% for a 30-year fixed-rate mortgage during 2020 and 2021 when the pandemic led to lockdowns, and lower rates were needed to spur economic activity, but they then climbed to nearly 8% last year amid a robust economy and rising inflation. No one wants another pandemic or economic catastrophe to push rates down again.

‍

In recent months inflation has come down, but unemployment has crept higher. The prospect of rate cuts already helped send mortgage rates lower, even before the Fed announced its actual decision on Wednesday. Long-term fixed-rate mortgage rates are now at 6.2%, the lowest since February 2023. So, the rate cut announced by the Federal Reserve was already priced in. That said, Orion believes that mortgage rates are bound to fall a little more given that policymakers have made clear they intend to continue cutting interest rates into next year.

‍

Before everyone breathes a sigh of relief, know that lower mortgage rates could actually mean higher housing prices for your clients! Lower mortgages are likely to lure more buyers back to the market, bringing in more competition fora limited supply of houses. And builders’ production of new homes has lagged the demand for them for years, making it tough for first-time homebuyers.

‍

Our brokers report that some buyers have struggled to find their first home as many were scared off by bidding wars during the low-interest-rate era four years ago, and then didn’t qualify because of higher interest rates and homeowner’s insurance costs skyrocketing. Supply has not kept pace with demand, especially as the large millennial generation is forming households and trying to buy homes, and building a conventional house takes several months. (For some reason, manufactured housing, despite its many benefits, has not increased substantially in popularity.)

‍

Lower mortgage rates can certainly bring down a homebuyer's monthly mortgage payment. But when home prices are sky-high, it will still be hard for many people to find a home they can afford. The move by the Fed will help certain parts of the economy, but in terms of housing, it will take more than the Fed's rate cut to fix America's housing problems.

‍