Now that inflation has subsided, the Federal Reserve is expected to cut interest rates by at least 0.25 percentage points this week. That should be good news for all Americans who need credit: business owners, students, and anyone looking to buy a home.

Until March 2022, the United States enjoyed historically low interest rates. In 2021, Americans were able to secure an average mortgage interest rate of just under 3 percent – a record low. Today, the mortgage interest rate is over 6 percent.

This high mortgage rate made it more difficult for many Americans to own a home. This meant that fewer homeowners wanted to sell and, as a result, buyers were competing for fewer homes while often having to make higher monthly mortgage payments.

Due to high mortgage rates and a tight housing market, home sales fell from nearly 6.5 million in January 2022 to a low of less than 3.8 million in December 2023. These numbers have recovered only slightly in the months since and remain well below normal levels. Low inventory helped median home prices rise to $426,900 in June, the highest level ever.

But now many potential buyers who have been waiting for interest rates to fall may begin looking for a home. But lower interest rates don’t necessarily lead to lower prices. In fact, some economists believe that home prices – and even rents – could actually rise.

“There’s a lot of pent-up demand right now from first-time home buyers, so I wouldn’t be surprised if there’s not a big price shift right after the rate cut because there are a lot of people waiting,” says Julia Fonseca, a finance professor at the University of Illinois at Urbana-Champaign.

Mortgage rates have already fallen from over 8 percent in anticipation of lower interest rates. They could fall even further if the Fed announces further rate cuts later this year that go beyond financial analysts’ expectations.

This could lower Americans’ monthly mortgage payments. But housing costs are influenced by factors beyond interest rates. They also depend on availability, and lower interest rates won’t solve this problem immediately. Buyers, especially first-time buyers – who often compete for a limited supply of first-time homes in urban areas – will likely continue to find that homes are in short supply.

That’s partly because many homeowners who had locked in low interest rates weren’t willing to give them up. According to a recent study by Jack Liebersohn, an economics professor at the University of California Irvine, and his co-author Jesse Rothstein of the University of California Berkeley, higher interest rates meant that homeowners with mortgages were 16 percent less likely to move in 2022 and 2023 than in 2021.

This hesitation seems to be well-founded: Lu Liu, a finance professor at the University of Pennsylvania, and Fonseca found that homeowners with a fixed mortgage rate of four percent save an estimated $50,000 compared to what they would have to pay on a new mortgage of the same amount at an interest rate of seven percent.

If rates fall, it should become easier for homeowners to justify selling because they can get a comparable mortgage rate on a new home. This could help increase inventory, but perhaps not enough or quickly enough to offset the expected large surge in demand from buyers.

Caitlin Gorback, a finance professor at the University of Texas at Austin, said economic research suggests that, on average, home prices rise by 5 to 10 percentage points for every one percentage point drop in interest rates. Given that, she said, “it’s unlikely that a rate cut will cause home prices to fall.”

The forces at work in the housing market also affect renters. Liu, Fonseca and their co-author Pierre Mabille of INSEAD point out in another recent article that rents could rise if potential buyers continue to be shut out of the market.

“There is a certain chance that price pressure will also be felt in the rental market,” Liu said.

However, there are some long-term factors that could mitigate this pressure. For example, the construction of multi-family homes has declined significantly due to high interest rates, said Liebersohn. Lower interest rates should make it easier for developers to get a bank loan to build multi-family homes.

“I really hope that lower interest rates lead to an increase in multifamily construction,” he said. “It won’t have an immediate impact on rents, but it will in the long run, and that could be really important.”

Many multifamily property owners also have to take out a new loan every ten years to finance their properties. If they can get new loans at a lower interest rate, some of them can pass some of the savings on to their tenants by not raising their rents as much as they otherwise would.

Both factors may change slowly, but overall, “this means that renters will benefit from lower interest rates in the future,” Liebersohn said.