After months of anticipation, the Federal Reserve cut interest rates on Wednesday by half a percentage point.

That will have an impact on the housing market — but it's unlikely to make a huge difference for those struggling to afford a home.

Let's take a look.

Mortgage rates might not actually drop much further right now

Mortgage rates have been pretty high for the last couple of years, especially compared with the historic lows they reached during the peak of the COVID-19 pandemic.

Rates bottomed out below 3% for a 30-year fixed-rate mortgage during 2020 and 2021 when the pandemic led to lockdowns, but they then climbed to nearly 8% last year amid a robust economy and rising inflation.

But the prospect of rate cuts has 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. (It's worth noting, though, that other factors besides the Federal Reserve's benchmark interest rate influence mortgage rates, including economic conditions.)

Lower mortgage rates could actually mean higher housing prices

Here's the thing: Lower mortgage rates may not make it easier to buy a home. In fact, it could make it more difficult and lead to higher home prices.

That's because lower mortgages are likely to lure more buyers back to the market, bringing in more competition for a limited supply of houses.

That's tough for first-time homebuyers. Kim Kronenberger, a real estate agent in the Denver area, says she worries for the would-be homebuyers who keep waiting for affordability to improve.
 

Dropping interest rates could lead to more housing supply

A key reason for high home prices currently is the lack of housing supply: The U.S. is short millions of housing units. Supply has not kept pace with demand, especially as the large millennial generation is forming households and trying to buy homes.

High interest rates didn't help, making it harder for some homebuilders to get projects off the ground, especially smaller, private developers. That's because the rates on loans that builders get for acquisition, development and construction are closely tied to the rate set by the Fed.

Affordability will still be a big problem

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.

Dougherty, the Wells Fargo economist, says home prices have risen by about 50% since early 2020, faster than average household income growth during that time.

"That has been a really big driver in terms of making housing out of reach for a lot of prospective buyers," he says.

During the pandemic, a huge number of homeowners refinanced their mortgages to take advantage of record-low rates. Nearly 60% of active mortgages now have rates below 4% — rates so low that those homeowners are unlikely to refinance again.

"For more information, please click here."