On Sept. 18, the Federal Open Market Committee lowered interest rates by half a percentage point, the first decrease since March 2020. The ripple effects of this decision have already been felt throughout many economic sectors, impacting everything from auto loans to credit cards. Housing industry experts are keeping a particularly close watch on how this decision will influence mortgage rates, which have been remarkably volatile since the onset of the COVID-19 pandemic in 2020.

While it’s impossible to know exactly how the economy or any industry will look a year or even a month from now, there are some trends we can predict in the housing industry in the wake of lowered interest rates. Here’s what we know about how the Fed rate cut might shape the next few years of housing in the United States.

Impact on the Housing Industry

One of the main factors limiting housing growth over the last few years has been a lack of inventory. There simply have not been enough houses being built. Contractors are optimistic this could change if this rate cut is the first of many and incentivizes builders to take out more loans and invest more in new construction.

“If we have a series of rate cuts over the next three to six months, that will likely start to show up in lower construction [loan] rates and greater availability of equity investment toward the end of this year and into next year,” John Sullivan, chair of the U.S. real estate practice at DLA Piper, a London-based law firm, told Construction Dive. “As rates come down, borrowing costs will also come down for many projects, and there will be more real estate investment and construction activity.”

That’s a hopeful prognosis, largely dependent on further interest rate cuts that may or may not happen. It does make logical sense: if the Fed continues its rate-dropping trend, construction activity will likely increase. Unfortunately, interest rates are not the only factor limiting the growth of the home-building industry.

“Because we lost about a million construction workers during the Great Recession, we still lack that. So we need people desperately to come into the trades,” Danushka Nanayakkara-Skillington, the National Association of Home Builders’ (NAHB) associate vice president of forecasting, told Business Insider. She noted that along with the labor shortage, material prices have also hampered housing for the last few years and contributed to those subdued production levels.

Still, this interest rate cut is certainly a step in the right direction and puts housing on a better path toward renewed growth. The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index, which tracks builder optimism in the current state of the housing market, rose two points in the wake of the Fed’s announcement.

“The macroeconomy is starting to right itself,” said Jim Tobin, CEO of the NAHB, on NAHB’s podcast Housing Developments. “So now is the time for lawmakers — whether at the federal level or state or local level — to jump on the housing bandwagon and get ready for that growth.”

Impact on Home Buyers

On the other side of the market are home buyers waiting for mortgage rates to drop from historically high levels. While mortgage rates did hit 6.4% (their lowest point in over a year) in early September, buyers have still been reluctant to sign on to such a high rate. In fact, the NAHB recently reported that new home sales fell in August due in part to homebuyers waiting to make a move until after the Fed announced the rate cut.

But will the Fed’s rate cut actually spark a trend of mortgage rates dropping? Experts say it’s unlikely, at least in the immediate aftermath. In fact, we might see a bit of an uptick.

“We’ve seen the bulk of the easing that we’re going to get already this year,” said Danielle Hale, chief economist at Realtor.com told Finance and Commerce. “I wouldn’t be entirely surprised if mortgage rates ticked up a bit from here before declining again.” 

Whether or not mortgage rates continue to decrease beyond this year depends on how the economy responds. If the economy remains sluggish, the Fed may be forced to cut rates even more drastically.

“Ultimately, the pace of mortgage and Fed rate declines will be dictated by economic data,” Rob Cook, vice president at Discover Home Loans, told Finance and Commerce. “If future data shows that the economy is slowing more than expected, it would increase pressure for the Fed to take more aggressive action with rate cuts, which would likely translate into lower mortgage rates available to consumers.” 

If mortgage rates do eventually fall below 5% again, homeowners with high mortgage rates would be motivated to sell— which, in turn, would help ease the housing industry’s inventory problem. However, experts say it will be at least 2027 before mortgage rates tumble that far.

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Harrison Kral
Harrison is a writer, editor and former construction worker covering the home building industry, the housing market and general DIY trends.
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Harrison Kral