How Fed’s Rate Cut Will Affect Housing

Q: How will the fed’s new rate cut affect housing? Haley, Montauk, NY

A: The Federal Reserve announced that it would cut interest rates for the first time since the last recession. Economists are split on the immediate impact it will have on the housing market—what else is new?! Borrowers with adjustable-rate mortgages and commercial real estate loans will benefit from the rate cut. The important issue is how and if the fed’s rate cut will affect mortgage rates. The chief economist at realtor.com doesn’t believe the Fed’s rate cut will lead to a drop in longer-term mortgage rates because the rate cut announcement was anticipated. However, a rise in mortgage rates could further weaken already slowing housing markets, as home buyers, especially first-time homebuyers struggle with affordability. Every 1% increase in mortgage interest rates reduces a home buyer’s purchasing power by 9% when they get a mortgage.

Both rents and home prices have been outpacing personal incomes in the US for a while–this trend cannot continue indefinitely because home prices have to ultimately align with personal incomes because personal incomes and the economy are the real drivers of real estate markets. Thanks for your question, Haley.

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