US housing market stalls ahead of Fed's rate cuts

A long-anticipated shift by the Federal Reserve from interest rate hikes to reductions has triggered a substantial decline in mortgage rates. However, despite a bevy of potential buyers on the sideline, many owners are in no hurry sell.

The Fed cut its benchmark federal funds rate by 50 basis points in September and is expected to reduce them by another 75 basis points or more before the end of 2024. The benchmark 30-year mortgage rate, which had climbed as high as 7.79% in late October as the central bank held rates at more than 20 year highs in order to drive down inflation, fell to 6.08% as of September 26, according to Freddie Mac.

Meanwhile, home sales have dropped to their lowest levels in 14 years. Economists caution that while sales may tick up with rates falling, supply will likely remain constrained as millions of homeowners who bought or refinanced when mortgage rates were below 3% in 2021 remain reluctant to sell.

"While lower mortgage rates are expected to boost home-buying demand from their cyclical lows, sales activity will remain constrained by the rate lock-in effect, thereby limiting inventory," said Sam Williamson, a senior economist at First American. "And you can't buy what's not for sale."

Falling rates

The decline in mortgage rates over the last year has boosted housing affordability.

For example, the median US home would sell for $412,300, according to the latest government estimates. With a 6.08% mortgage rate, a potential homeowner putting 20% down would pay a mortgage of $2,332 per month. That comes to $377 per month less than a homeowner would pay with a mortgage rate of 7.79%.

"We came down enough on rates and there's been a lot of people who have been waiting for a moment like this to jump back into the market," said Ben Ayers, a senior economist at Nationwide Insurance, in an interview. "If you combine lower rates with hopefully a constructive economic environment that should be a real boon for the housing market."

That boon is yet to be seen though, as sales of existing single family homes fell to a seasonally adjusted annual rate of 3.48 million in August, the lowest level since 2010, and a 40% drop from the peak of sale in January 2021, according to National Association of Realtors. The median sales price for an existing family home was $422,100 in August, within striking distance of a record high, according to the association's latest data.

Rising prices and relatively high mortgage rates have kept potential buyers out of the market, a trend that could change as rates come down.

"There's pent up demand and that demand is just starting to unlock," Dutch Mendenhall, a real estate investor and co-founder RADD Companies. New home construction will start to ramp up, while demand for specific housing, such as tiny homes, could soon surge, he added.

Not for sale?

Existing home sales will rise from current cycle lows, but be limited by the "lock-in effect" for those with mortgages well below current levels, Williamson with First American said.

The lack of existing home inventory, along with pent-up demand and lower rates, could support some growth new home sales into next year, he said. Lower interest rates could boost home construction thanks to favorable lending conditions and lower construction costs, Williamson added.

While most homeowners may remain reluctant to move out of a house with a 3% mortgage, their circumstances always stand to change, said Derrick Barker, CEO and founder of Nectar, which provides financing to real estate developers. Growing families may need larger houses, older couples may need to downside, or a career changes may necessitate moving.

The market will come to accept that the mortgage rates of the early pandemic are not returning, as a new normal for housing costs settles in, he said.

"People are realizing that we may not see rates that low in decades, if ever again," Barker said. "The Fed cutting rates gave some people the nudge they needed to sell their home to move into another one. But there is still a huge gap in affordability between interest rates from a few years ago and interest rates today."