After months of anticipation, the US Federal Reserve cut its key interest rate by half a percentage point on Wednesday.

This will have an impact on the real estate market – but for those who can barely afford a home, it may not make much difference.

Let’s take a look.

Mortgage interest rates are unlikely to fall much further at present

Mortgage rates have been quite high over the past few years, especially compared to the historic lows they reached during the height of the COVID-19 pandemic.

When the pandemic caused lockdowns in 2020 and 2021, interest rates on 30-year fixed-rate mortgages fell below 3%, but then climbed to nearly 8% last year amid a robust economy and rising inflation.

But the prospect of interest rate cuts has already helped lower mortgage rates even before the Fed announced its actual decision on Wednesday. Long-term fixed-rate mortgage rates are now at 6.2%, the lowest since February 2023. (It is worth noting, however, that other factors besides the Federal Reserve’s benchmark rate also influence Mortgage rates, including economic conditions.)

This means that the rate cut announced by the US Federal Reserve may already be priced in. However, mortgage rates are sure to fall a little further, as central bankers have made it clear that they plan to continue cutting rates next year.

Charlie Dougherty, a senior economist at Wells Fargo, expects a “slight” decline in mortgage rates following the Fed’s rate cut on Wednesday.

He and his colleagues predict that the average interest rate on 30-year fixed-rate mortgages will be around 6.2% by the end of this year – around current levels.

However, Dougherty expects the interest rate on 30-year mortgages to fall to about 5.5 percent by the end of 2025, still above pre-pandemic levels.

Lower mortgage rates could actually mean higher property prices

The problem is that lower mortgage rates don’t necessarily make buying a home easier. On the contrary, they could even make it more difficult and lead to higher property prices.

The reason for this is that lower mortgage rates are expected to attract more buyers back to the market, creating more competition for the limited supply of homes.

That’s tough on first-time buyers. Kim Kronenberger, a Denver real estate agent, says she worries about the potential homebuyers who continue to wait for affordability to improve.

These buyers had difficulty finding their first home because many They were deterred by bidding wars during the low interest rate period and then deterred by high mortgage rates and still high prices.

“Many of these buyers absolutely regret it,” she says of people who didn’t buy a home at the beginning of the pandemic, when interest rates were low but home prices hadn’t yet skyrocketed. “Because if they had bought four years ago, they would be in a very different situation than they are now.”

Don Payne, a real estate agent in Columbus, Ohio, says there is a greater supply of larger homes for buyers upgrading to a larger home: “The builders are building them, and the existing homeowners have them, too.”

The big problem is the lack of homes for first-time buyers.

“People want to get their first home, and there is a huge shortage,” he says.

Falling interest rates could lead to more housing supply

A major reason for current high housing prices is the lack of housing supply: There is a shortage of millions of housing units in the United States. Supply cannot keep up with demand, especially as the large Millennial generation forms households and tries to buy homes.

High interest rates did not help, Some developers, especially smaller, private developers, are finding it more difficult to get their projects off the ground. This is because the interest rates on loans developers receive for acquisition, development and construction are closely tied to the interest rate set by the Fed.

This interest rate cut should make it easier for developers to start building again.

The fact that lower mortgage rates are expected to encourage more home buyers will also be an incentive for builders to start building.

This is good news for the supply side of the housing equation – more homes are being built and brought to market, alleviating some of the demand that is driving up prices. But of course, it will take some time for those homes to be completed.

Affordability will continue to be a major issue

Lower mortgage rates can certainly lower a homebuyer’s monthly mortgage payments. But if home prices are astronomically high, many people will still have a hard time finding a home they can afford.

According to Dougherty, the economist at Wells Fargo, home prices have risen about 50% since the beginning of 2020, faster than the average growth in household income during that period.

“This has contributed significantly to making housing unaffordable for many potential buyers,” he says.

During the pandemic, many homeowners refinanced their mortgages to take advantage of record-low interest rates. Nearly 60% of active mortgages now have interest rates below 4%—rates so low that they are unlikely to refinance again.

In fact, most homeowners will still be hesitant to sell their current home because they would have to pay a higher mortgage rate today. Lower interest rates will mitigate the so-called “lock-in effect” somewhat, but will not change homeowners’ reluctance.

Greg McBride, chief financial analyst at Bankrate.com, points out that even the decline in mortgage rates in recent weeks has not given the real estate market a real boost.

“Housing prices are still at record highs and inventory levels are below pre-pandemic levels,” he says. “None of these variables are expected to improve dramatically in the near future.”

In other words, solving the problems of the American housing market will require more than a Fed interest rate cut.