Interest rate cut unlikely to solve housing crisis, Moody’s economist says

The Federal Reserve’s anticipated interest rate cut in September is unlikely to solve the housing affordability crisis, according to Nick Villa, a Moody’s economist. In a recently published report, Villa explained that although the bond market has already priced in a rate cut, this alone will not stabilize the volatile housing market. Lower mortgage rates might offer some relief, but if unemployment continues to rise, fewer people will be in a position to buy homes. Moreover, mortgage rates have yet to reach the desirable benchmark of around or under 6%, limiting the potential impact on market activity. The Fed’s interest rate hikes over the past two years have pushed mortgage rates up sharply from their pandemic-era lows. Although they have decreased recently, reaching a 52-week low of 6.34% before climbing back to 6.52%, the broader economic impact on homebuyers remains significant. Home prices continue to be elevated despite a slowdown in price inflation. Villa pointed out that the difference between the cost of renting and homeownership, which traditionally favored renting for many years, has now flipped.

Rate cut’s limited impact on housing

Even with a potential reduction in mortgage rates, renting could still be more cost-effective for many unless rates drop below 5.25%, based on current median home prices. The core problem remains supply. Two critical factors, the lock-in effect and years of underbuilding, contribute to the current housing shortfall. The lock-in effect, where homeowners with low-rate mortgages are reluctant to sell and lose their favorable terms, restricts market supply. However, the longstanding issue of underbuilding has resulted in an estimated housing shortage of at least 1.9 million homes since the Global Financial Crisis. While new homes continue to be built at a healthy pace, these efforts combined with interest rate cuts will not completely resolve the issue. Fed Chair Jerome Powell acknowledged the market’s structural challenges, stating, “Problems associated with low rate mortgages and high rates will abate as the economy normalizes and rates normalize. But we’ll still be left with a housing market nationally, where there is a housing shortage.” In conclusion, while a September interest rate cut by the Fed might provide some relief, it will not be a panacea for the housing crisis. The underlying issues of supply constraints and economic volatility will continue to pose challenges in the foreseeable future.