Will Lower Rates Help the Housing Market? Fed Chair Powell’s Not So Sure.

High mortgage rates have been a big problem for both home buyers and sellers, and some lawmakers and administration officials are asking whether it’s the Federal Reserve’s fault. 

Last week, Federal Reserve Chair Jerome Powell took heat from lawmakers and White House officials after the central bank held its federal funds rate for the fourth time this year. Lawmakers from both sides of the aisle criticised Powell about how the higher-than-usual fed funds rate contributes to housing unaffordability.

The federal funds rate influences interest rates on all kinds of personal loans. It can influence mortgage rates, but they do not move in tandem with the Fed’s key benchmark rate as much as other types of loans.

Mortgage rates have been elevated for several years, currently hovering around 6.8%. That’s well above 2020 levels, when home borrowing costs fell below 3% and many people bought homes or refinanced during that time. Because of that, sellers are reluctant to list their homes and give up the low rate for a higher one, creating a “lock-in” effect for homeowners. 

“It’s not obvious, though, that lower rates would lead to lower housing inflation, because, of course, that would increase housing demand. It would unlock people’s low mortgages, but that creates both a buyer and a seller,” Powell said during his July 25 testimony to the Senate Banking Committee.

When the Fed last cut rates, it dropped them by a percentage point in late 2024. Mortgage rates briefly rose in the wake of the cuts and eventually settled near the same level as before the central bank took action.

Mortgage Rates Are Just One Aspect of Affordability

Mortgage rates aren’t the only thing contributing to high housing costs.

Low inventory has pushed home prices higher in recent years: A Redfin report found that the median U.S. home price hit a record $396,500 during the month ending June 15.

A long-term housing shortage in the U.S. started after the 2008 housing crisis, when builders slowed down production when demand dropped. That has created a housing market short nearly 4 million homes to meet demand, a Realtor.com study showed.

In his recent congressional testimony, Powell resisted the idea that lower interest rates would lead to improvements in the housing supply and, thus, lower housing prices. 

“Once…short-term rates are down to normal, whatever the new normal level is, I think housing costs are still going to be high,” Powell said. “We’re still going to be faced with high insurance costs and high material costs and labor shortages and all the things that keep driving housing prices up across the country.”