Home Sales Are Stuck in Neutral—Will the Fed Put Them Into Gear?

Both new and previously owned home sales have stalled so far this spring, but economists think the Federal Reserve could hit the gas if it decides to cut rates.

High mortgage rates are stifling the housing market in pretty much every way except in prices. Sales of new homes fell more than economists expected, existing homes stayed in the doldrums in April, and homebuilding fell short of expectations. Pending home sales were also lackluster, indicating that home sales will continue to stagnate in the near future.

The average rate for a 30-year mortgage rose back above the 7% level this week, according to Freddie Mac. Investopedia's daily measure of mortgage rates similarly showed interest rates rising. Rates have hovered near 7% since April by both measures.

Housing economists expect mortgage rates will fall substantially at some point, especially if and when the Federal Reserve decides to cut its influential fed funds rate. The fed funds rate is one major driver of mortgage interest and is also the central bank's main tool to fight inflation.

The Federal Reserve's Inflation Fight Is Influencing Mortgage Rates

Officials have kept the rate at a 23-year high since last July to combat rapidly increasing prices. They said they'll only lower it once they gain enough confidence that inflation is under control. But that hasn’t happened yet, and may not anytime soon, going by the recent public statements of Fed officials.

"The impact of escalating interest rates throughout April dampened home buying, even with more inventory in the market,” said National Association of Realtor's Chief Economist Lawrence Yun in a prepared statement. “But the Federal Reserve’s anticipated rate cut later this year should lead to better conditions, with improved affordability and more supply.”

Homeowners with low interest rates have been reluctant to sell their current homes and finance a new mortgage at today's higher rates. This "lock-in" effect has created competition for the few listings on the market, driving up housing prices. But that gridlock has loosened some in recent weeks.

"Though inventory and prices are moving in a more buyer-friendly direction, lower mortgage rates will be crucial in bringing both buyers and sellers back into the market," wrote Realtor.com's Senior Economic Research Analyst Hannah Jones.

Realtor.com Economist Jiayi Xu estimates mortgages will decrease to around 6.5% by the end of 2024. However, Fannie Mae economists have predicted rates will have to go significantly below 6% to shake loose the lock-in effect.

Are Rate Cuts on the Way?

However, lower mortgage rates are not guaranteed.

Economists differ in their expectations of when the Federal Reserve will cut rates, but on average, see September as the most likely timeframe, according to a survey of economists conducted by Reuters earlier this month.

Traders priced in a 50% chance officials will cut in September and a 63.3% chance at the following meeting in November. A recent analysis by Apollo's Chief Economist Torsten Sløk found a strong stock market and fiscal policy have been offsetting Fed hike.

"The more the Fed insists that the next move in interest rates is a cut, the more financial conditions will ease, making it more difficult for the Fed to cut," Sløk wrote.