When the Federal  Reserve (Fed) began hiking interest rates at the beginning of 2022, it turned the housing market upside down. The housing market, more than any other segment of the economy, was negatively impacted as the rate environment changed. Higher mortgage rates initially slowed demand, then dampened housing supply, particularly for those in the market for existing homes. 

A combination of rising home prices and the highest mortgage rates in more than 20 years, creates a budgeting challenge for potential homebuyers. According to Rob Haworth, Senior Investment Strategy Director at US Wealth Management, “The combination of higher home prices and elevated mortgage rates creates a meaningful headwind for new homebuyers. They either need to be able to make a bigger down payment or they must earmark more of their monthly budget for housing costs.”

In December 2023, the Fed's Summary of Economic Projections (SEP), projected three rate cuts in 2024 by the Central Bank. However at the end of March, the Fed's Federal Open Market Committee (FOMC) left the short-term federal funds rate steady at a 23-year high of 5.25% to 5.5%.Interest rate traders are hoping that the FOMC will enact its first quarter cut rate in June. 

Housing economists are waiting with bated breath for these anticipated rate cuts to begin. Home prices have dropped sharply and appreciation has slowed nationally since the Fed began raising rates in 2022. Since home prices are not solely driven by interest rates, it can be difficult to predict how rate cuts will affect the housing market. Still, the Fed’s policies set the overall tone for mortgage rates. The Fed bumped rates seven times in 2022, a year that saw mortgage rates jump from 3.4 percent in January all the way to 7.12 percent in October. Clare Losey, an economist at the Austin Board of Realtors in Texas, says that such increases diminish purchase affordability, making it more difficult for lower-income and first time buyers to purchase a home.

The predicted cuts by the Fed should typically lead to lower mortgage rates. Selma Hepp, Chief Economist at Core Logic stated, “Lower mortgage rates would help spur home sales activity, which are expected to increase in 2024 compared to 2023.” Additionally, Hepp concluded that, “Declines in mortgage rates will drive more sellers to trade their existing home and help add much-needed inventory to the market, leading to more transactions.” More inventory may lead to more competitive housing prices and reasonable affordability for home buyers. 

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