The Blubber

An interest rate cut won’t fix the housing crisis, Moody’s economist has said.

In a recent analysis titled “A September Rate Cut is Not Enough to Relieve the Housing Affordability Crisis,” a Moody’s economist noted that the bond market has already factored in a potential rate cut, whether it’s by half a point or a quarter. The average interest rate on a 30-year fixed mortgage is linked to the yields on 10-year Treasury bonds, which have recently fallen to about 3.7%, the lowest since May 2023. Fixed-rate mortgages and Treasury yields generally move in tandem, but the impact on the housing market remains uncertain.

The Fed lowers interest rates to stimulate the economy and encourage borrowing. However, if the Fed delays too long, there's concern about a hard landing for the economy; if it cuts rates too quickly, inflation might spike. Both scenarios are challenging for the housing market.

“Even with the anticipated first rate cut of this cycle likely to occur in September, the federal funds rate will still be in restrictive territory. Additional cuts will be necessary to bring the housing market to a more balanced state,” wrote economist Nick Villa.

Since the Fed began raising interest rates over two years ago, mortgage rates surged, moving away from the pandemic’s historically low levels. Daily mortgage rates peaked at 8.03% in October of last year but have declined recently, particularly in response to recent weak economic data. As of yesterday, daily mortgage rates hit a 52-week low of 6.34%, though they have since risen to 6.52%. Despite this, home prices continue to climb. Although home price inflation has slowed, it has not reversed. Villa pointed out that after 15 years of renting being more expensive than homeownership, the situation has now reversed, with the gap reaching a record high.

Villa added: “While rate cuts will help, a 25- to 50-basis point reduction in the 30-year fixed mortgage rate will not be sufficient to make renting more expensive than owning, based on current median home prices. To make renting more expensive again, the 30-year fixed mortgage rate would need to fall below 5.25%, given the median home price of $426,900 and the median new home price of $417,300 as of June, the most recent data available.”