How the Fed’s expected move to cut rates at their next meeting might impact the real estate sector

Federal Reserve Chairman Jerome H. Powell sent a clear signal in his Aug. 23 speech at the Fed’s annual economic symposium at Jackson Hole, Wyo.  “The time has come for policy to adjust,” With the Fed’s expected move to cut rates at their next meeting on Sept. 17-18, we explore insights from sector experts and the potential impact on the real estate sector. 

The Federal Reserve has played a key role in driving the housing market since 2020. After a period of hiking and then holding rates that kept home sales muted, the Fed is set to return to rate cuts this month when policymakers meet.   “Fed interest rate cuts in general will bring about lower [mortgage] rates, which is a definite boost to the housing market,” says Greg McBride, CFA, chief financial analyst for Bankrate. “But it won’t happen overnight or as a knee-jerk reaction to the Fed’s initial interest rate cut.”

“Once interest rates begin to fall, I think there’s a boom — on the homebuying side, but also on the homebuilding side — through access to capital,” says Jim Tobin, CEO of the National Association of Home Builders.  While homebuyers would welcome news of lower rates, they could also face the same run-up in home prices brought on the last time the Fed cut rates, in 2020.  “Lower interest rates could stimulate both increased home supply and demand,” McBride says. “The best-case scenario is a gradual decline in rates that is beneficial to home builders, homebuyers and home sellers, rather than a sharp plunge in mortgage rates that leads to a surge in demand that supply can’t keep up with.”

In June 2020, a 30-year fixed mortgage averaged 3.44 percent. That same month, the median existing-home sale price was $294,400. One year later, rates were still in the 3s, but the median home price had shot up to $362,800 — a 23 percent increase.  Since then, mortgage rates have gone up considerably. So have home prices, though to a lesser degree.  There’s also a noticeable link between the Fed’s first rate hike in March 2022 and declining home sales.

Looking at the past two years, existing-home sales are now 32 percent lower compared to 2022.  The Fed’s moves have also had some impact on housing inventory, which hasn’t kept up with demand due to years of underbuilding, rising material costs, a labor shortage and more recently, the lock-in effect.

When the Fed slashed rates in 2020, the surge in homebuyer demand collided with an avalanche of homeowners refinancing to lower rates, keeping them in their homes rather than putting those properties on the market. By 2022, the months’ supply of existing-home inventory had bottomed out at 1.6 months, according to the National Association of Realtors (NAR). Generally, inventory is considered balanced at six months.  The months’ supply measure has since increased alongside mortgage rates, to 4.1 months as of June, according to NAR.

At KinneyMunro we can help guide you on how to optimally position your portfolio as U.S. central bankers turn the monetary policy page, and kick off a rate cutting cycle.   

Sources: Bankrate, National Association of Realtors

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