The Federal Reserve’s recent interest rate cut has sparked a heated political debate over its effects on the housing market.
At a Glance
- The Federal Reserve cut its benchmark interest rate by half a percentage point, aiming to bolster the job market.
- The rate cut could help first-time homebuyers by lowering mortgage rates.
- Kamala Harris supports reducing housing expenses, while Donald Trump advocates for adaptable zoning regulations.
- Critics argue that market dynamics, not federal interventions, are the primary drivers of housing prices.
Federal Reserve’s Half-Percent Interest Rate Cut
The Federal Reserve recently cut its benchmark interest rate by half a percentage point, the first such reduction in over four years. This move aims to bolster a slowing job market and is a response to inflation decreasing from a peak of 9.1% in mid-2022 to 2.5% in August. Despite the reduction in inflation, many Americans still worry about the high prices for essential goods.
This rate cut lowers the key rate to approximately 4.8% from 5.3%, with plans for additional cuts in November and December, and more cuts projected in 2025 and 2026. The Federal Reserve aims to bring its benchmark rate to a “neutral” level, estimated by analysts to be between 3% and 3.5%. As a result, borrowing costs for mortgages, auto loans, and credit cards are expected to decrease.
Implications for the Housing Market
Current long-term fixed-rate mortgage rates have dropped to an 18-month low of 6.2%, the lowest since February 2023. Wells Fargo economist Charlie Dougherty predicts that mortgage rates could drop further, potentially reaching 5.5% by the end of 2025. Lower mortgage rates could increase competition in the housing market, potentially driving up home prices.
“Lower mortgage rates are expected to spur more buyers to enter the housing market.”
However, the United States faces a housing supply shortage, exacerbated by previous high-interest rates and challenges for homebuilders. Home prices have risen by about 50% since early 2020, outpacing household income growth. Many homeowners refinanced during the pandemic to secure low rates, making them reluctant to sell now. This has further tightened the housing inventory.
Political Ramifications
The Federal Reserve’s monetary policy significantly impacts housing prices, contributing to housing inequality. Policies like Quantitative Easing during the Great Recession involved large-scale bond purchases, including mortgage-backed securities, injecting $120 billion a month into the economy. Easy money policies have driven capital into housing investments, with significant involvement from financial institutions and small speculators.
As Karen Petrou, the author of “Engine of Inequality: The Fed and the Future of Wealth in America,” noted, “The benefits of the Fed’s huge QE-based portfolio . . . over time were 10 times greater for stock market prices than for overall economic prosperity.”
This shift has created a new class divide based on housing ownership, with home prices soaring during the pandemic, contradicting many predictions. Former President Donald Trump blames the Biden-Harris administration for the inflationary surge, while Vice President Kamala Harris counters that Trump’s policies would further raise prices for consumers.
Despite policy differences, one thing is clear: market dynamics, not federal interventions, primarily influence housing prices. “It will take more than the Fed’s rate cut to fix America’s housing problems.”
Ultimately, the debate will likely continue as both sides argue over the best path forward for America’s housing market and economic stability.
