The Federal Reserve cut interest rates for the second meeting in a row on Wednesday, making home buying slightly more affordable. However, even though the move may ease borrowing costs slightly, it might not be enough to motivate potential homebuyers.
Home prices remain high, and limited inventory in most markets continues to affect affordability.
The Federal Open Market Committee voted 10 to 2 to lower its key interest rate, which influences borrowing costs across the economy, to between 3.75% and 4%, according to reports. Fed Chair Jerome Powell hinted that further cuts might not happen again this year.
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Mortgage rates fell to around 6.17%, according to Freddie Mac, making home loans cheaper than they’ve been in years. In fact, mortgage rates are now close to their lowest point in the past three years.
Even with lower rates, fewer people are buying homes, Redfin reports, because they’re worried about the economy and frustrated by still-high prices. For the third week in a row, pending home sales have continued to drop, as the number of homes under contract to be sold but not yet closed fell 0.7%, according to Redfin. This data suggests that fewer people are going through the home buying process.
Affordability still out of reach for many
Based on current home prices and incomes, the average home is only considered affordable if mortgage rates fall to about 4.43%, Zillow Economic Analyst Anushna Prakash reported over the summer. She said it’s very unlikely that rates will drop that low anytime soon, so housing affordability will remain tight.
In very high-cost cities like New York, Los Angeles, Miami, San Francisco, San Diego, and San Jose, homes are so expensive that even if mortgage rates were zero, the typical buyer still couldn’t afford the average home there. In more affordable regions, like parts of the Midwest and the Inland South, homes are cheap enough that even if mortgage rates rose above 6.7%, they could still be within reach for a typical local buyer, Prakash reported.
People who bought homes when rates were much lower, like around 3% during the COVID-19 pandemic, don’t want to sell because if they buy another home now, they would have to take on a new mortgage at a much higher rate. Even if they could sell their current home for a profit, that extra money would not fully offset the higher costs of buying a new home with today’s higher rate.
Warren Buffett’s Berkshire Hathaway HomeServices calls this phenomenon the “Golden Handcuffs,” meaning homeowners feel “trapped” in their current homes because of their low existing mortgage rates. Moving would mean losing that low rate and taking on a much costlier one, so they stay put.
Buyers may gain leverage in some markets
Zillow predicts that home prices across the country will drop slightly — about 2% — by the end of the year. The housing app says home values have risen nearly 50% since 2019. A 2% price drop is too small to make homes significantly more affordable for people who’ve been unable to buy because prices are still high.
Even though homes are still expensive, buyers who can handle the current prices might find good opportunities now, since they have more leverage in negotiations, according to Redfin.
In some markets, buyers — not sellers — have the upper hand. Many sellers in areas with more homes for sale and fewer active buyers will have to compete more. Those sellers will have to be willing to cut prices or offer incentives, like covering closing costs or repairs, to attract buyers, Redfin reports.
Editor’s note: Lauren Keenan is a licensed real estate agent in the Omaha metropolitan area.
