The Fed's rate cuts were supposed to make borrowing cheaper. So why is it harder than ever to buy a house?

MW The Fed's rate cuts were supposed to make borrowing cheaper. So why is it harder than ever to buy a house?

By Aarthi Swaminathan

Home sales are on track for their worst year in nearly three decades

The Federal Reserve cut its benchmark interest rate for the third time this year on Wednesday as its effort to control inflation continued.

Though rate cuts have made the cost of borrowing cheaper overall, one of the biggest expenses Americans face has only grown: It's become harder to buy a home.

Home buyers have seen mortgage rates stay largely close to 7% throughout the year, and home prices keep climbing.

What's going on?

Mortgage rates have remained elevated throughout 2024. Most recently, right after the Fed's decision was announced, the 30-year mortgage rate jumped 22 basis points between Tuesday and Thursday, according to a survey compiled by Mortgage News Daily.

Home prices also remain elevated and hit all-time highs this year, even with fewer buyers in the market. The median price of a home sold in November increased by about 5% from the previous year to roughly $430,000, according to data from Redfin $(RDFN)$, a real-estate company.

The total number of homes presently for sale in the U.S. is still 26% below the typical level seen in 2018 and 2019, Zillow (Z) $(ZG)$, a real-estate platform, said recently.

That dynamic has resulted in the housing market being on track for another multidecade low.

"The fact that 2024 had fewer transactions than 2009 is wild," Leo Pareja, chief executive of eXp Realty, a brokerage, told MarketWatch in an interview.

Back in 2009, nothing would sell, he recalled. The U.S. was then in the grips of the Great Recession, which was fueled in part by a burst housing bubble that had left millions of homeowners in foreclosure.

In 2024, everything sells, and too quickly, and real-estate agents can't find enough homeowners interested in selling, Pareja said - yet transactions still remain at a low level.

One reason for that is that mortgage rates have remained high, which hurts both housing demand and supply.

Despite the rate cuts, mortgage rates remain at 7% due to financial markets' concerns about inflation in the U.S. economy. Mortgage rates don't directly follow the direction of the Fed's benchmark short-term interest rate; instead, they tend to move in tandem with the yield on the 10-year Treasury note BX:TMUBMUSD10Y, which rises when investors see inflation ahead.

The Fed's goal is to contain inflation. With the incoming Trump administration signaling its intent to impose tariffs on trade as well as tighten up immigration, markets are expecting the Fed to cut rates at a slower pace next year as consumer prices are expected to increase further.

And that's indirectly pushing mortgage rates up.

Read more: Trump the elephant in the Fed room as rate-cut plans scaled back

House hunters may face deja vu in 2025

For home buyers and sellers, the increase in mortgage rates only makes it less appealing to jump into the housing market.

Home buyers are already contending with an expensive housing market. Higher rates only add to the cost of financing a property, which dampens demand.

Home sellers looking to move are facing the same dynamic but with an additional dilemma: giving up their ultralow mortgage rate. And that, in turn, impacts housing supply.

"A higher mortgage rate would decrease the number of homes available for sale, as existing homeowners who locked in low mortgage rates during the pandemic would face a higher financial penalty from selling," Cris deRitis, deputy chief economist at Moody's Analytics, told MarketWatch.

Read more: 9 in 10 homeowners have a mortgage rate below 6% - here's why that's hurting the housing market

In other words, the higher rates go, the lower home sales go.

Economists widely expect mortgage rates to fall over the course of 2025. But house hunters should brace for another tough year, one expert said.

Fannie Mae (FNMA), which backs one in four residential mortgages in the U.S., expects the 30-year mortgage rate to average 6.2% by the fourth quarter of 2025, according to its December forecast.

"Heightened mortgage-rate volatility may present opportunities for would-be homebuyers to take advantage of temporary lows, and we may see stretches where housing activity is boosted by lower rates," Mark Palim, chief economist of Fannie Mae, said in a statement.

"But, on average, we expect mortgage rates to remain elevated and a hindrance to activity," he added.

Related: Lennar blames high mortgage rates for sales miss, but says its home prices also need to fall

"There's a strong sense of déjà vu on tap for 2025," Skylar Olsen, chief economist at Zillow, said.

"We are once again expecting mortgage rates to get better gradually, and opportunities for buyers should follow, but be prepared for plenty of bumps on that path," she added.

-Aarthi Swaminathan

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

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December 28, 2024 11:08 ET (16:08 GMT)

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