The Federal Reserve’s first interest rate cut in nine months is already reverberating through the economy, boosting consumer sentiment and sparking activity in the housing and mortgage markets.
The Fed lowered its benchmark rate by 25 basis points to 4.25%, and the impact was immediate. U.S. mortgage demand jumped 29.7% last week, while refinance applications surged 58% to levels not seen since the pandemic, according to data cited by The Kobeissi Letter from Bloomberg.
Mortgage rates on 30-year fixed loans have dropped 30 basis points this month, hitting their lowest level in nearly a year, according to Freddie Mac.
“Rate cuts are already being felt,” the newsletter noted, while warning that affordability remains a serious hurdle.
The challenge: Most homeowners are locked into mortgages well below current rates. Buying a home today is roughly $800 more expensive per month than holding onto an existing mortgage, according to Reventure data.
“Rate cuts alone will not bring relief to the housing market,” The Kobeissi Letter added. “For home prices to come down, supply must rise.”
That perspective is echoed by Investors Observer, which recently found the middle class has been priced out of nearly one-third of major U.S. cities, where household incomes fall short of the minimum needed to qualify for a mortgage on a typical home.
Economists expect mortgage pressures to ease as the Fed continues lowering rates, but whether that translates into meaningful affordability gains remains uncertain.
An inverse housing market
Affordability pressures have created a severe shortage of homes for resale, as many Americans opt to stay put rather than take on a costlier mortgage.
As a result, the average new home is now about $20,000 cheaper than an existing one, according to Realtor.com.
Homebuilders are leaning into this dynamic, offering steep incentives to move inventory.
“The affordability difference goes beyond sticker price, too, as many builders are offering incentives like cash at closing or reduced mortgage rates that make a major difference in upfront costs and monthly payments,” said Realtor.com economist Joel Berner.
Fannie Mae warned last December that the affordability gap would persist, with low inventory and mortgage rates above 6% likely to keep the housing market frozen for the foreseeable future.
“[O]n average, we expect mortgage rates to remain elevated and a hindrance to activity,” Fannie said.
Economist Peter Schiff also isn’t convinced that aggressive Fed rate cuts will ease affordability concerns.
“Cutting interest rates won’t fix the housing market. It just lets people borrow more money to buy overpriced homes,” he wrote last month.
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