Lower mortgage rates will bring much-needed normalcy to the housing market

• The Federal Reserve cut interest rates by half a point Wednesday, and mortgage rates are likely to move in tandem.
• The housing market looks a lot like the situation Katherine Hare and Stephen Boyd are about to encounter.
• Many are hoping for a much healthier market after a few years of boom and bust.

Katherine Hare and her husband, Stephen Boyd, are retirees looking to make a move. The couple has lived in the Chapel Hill area of North Carolina, where Boyd grew up, for many years. But now, Hare wants to be closer to her family in the West Hartford area of Connecticut.

With plenty of equity built up in their home, located in a booming local economy, the couple is in a position many Americans would envy: they likely won’t need to take out a mortgage on a new property. The biggest challenge, Hare thinks, will be the long-distance house-hunting.

Still, she’s well aware that the recent decline in borrowing costs will be helpful when the couple goes to sell their own home. The 30-year fixed-rate mortgage just touched 6.09%, its lowest level in over 18 months, down sharply from the recent peak of 7.79%.

“Lower mortgage rates will definitely help,” Hare said. “It will open up the market for us. When rates were lower, things were really, really cranking around here.”

What is holding back the housing market?

Mortgage rates don’t dictate the housing market – until they do. Ask any real estate agent why buyers aren’t buying, and most will say it’s the lack of inventory. But most housing-market inventory is simply houses that other people want to sell, and with nearly 90% of all Americans with a mortgage enjoying a rate below 6%, there’s no reason to move on unless absolutely necessary. With new listings scarce, the few properties that are on the market get snatched up quickly, and prices keep getting bid higher.

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That means the housing market looks a lot like the situation Hare and Boyd are about to encounter. The Federal Reserve cut interest rates by half a point Wednesday, and mortgage rates are likely to move in tandem as the central bank continues to ease.

Yes, prices may tick up as demand increases. Still, most observers think the entire housing ecosystem, not just those applying for a mortgage, will benefit from the "unlocking" effect. Many are hoping for a much healthier market after a few years of boom and bust.

“It’s market whiplash,” said Rick Sharga, CEO of CJ Patrick Company, a real estate consultancy. “We had a zero-interest rate policy for a few years to help with the unknowns of COVID. That pulled demand forward and made homes relatively affordable even though prices rose. Right now, affordability is at all-time lows, except for a period of the 1980s, so anything that will lower rates will be a boon.”

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On Thursday, the National Association of Realtors said that sales of previously owned homes fell 2.5% in August. At an annual pace of 3.86 million, sales are running roughly where they were at the depths of the foreclosure crisis a decade ago.

“Home sales were disappointing again in August, but the recent development of lower mortgage rates coupled with increasing inventory is a powerful combination that will provide the environment for sales to move higher in future months,” the group’s chief economist said in a statement.  

Housing market green shoots?

Still, there are some green shoots in the market. In August, homebuilders started construction on more homes and applied for more permits for future projects than in previous months. That will help bring much-needed inventory to the market.

More people applied for mortgages to purchase homes last week, the Mortgage Bankers Association said Wednesday, suggesting many Americans are looking for an opportunity to get off the sidelines.

Selma Hepp, chief economist for real estate data firm CoreLogic, says she doesn't think the market will pick up considerably for the remainder of 2024, but with a continued steady decline in rates over the next several months, hopes for the best kind of spring selling season: one with a sense of normalcy after all the zigs and zags.

"We should be going back to pre-pandemic norms," Hepp said in an interview. "The pent-up demand is there, but the lower the rate, the better."