Don’t expect a rate cut to fix America’s housing crisis, Moody’s says

It’s going to take much more than an interest rate cut to make America’s homes affordable again.
According to a recent analysis by Moody’s economist Nick Villa, the mortgage market has already "priced in" an interest rate cut as soon as September.
With home prices at record highs, even a 0.5% reduction in mortgage rates “would not be enough to turn the tables such that renting becomes more expensive” than buying a home, Villa said.
“Even with the first potential rate cut of this hiking cycle likely to occur in September, the federal funds rate would still be in restrictive territory with additional cuts needed to help restore the housing market to a more balanced equilibrium,” Villa wrote.
In his view, mortgage rates would need to plunge below 5.25% for homebuying to make sense again. Although mortgage rates have chugging lower since May, they remain well above that threshold.
According to Freddie Mac, the average 30-year fixed-rate mortgage was 6.47% in the week ending Aug. 8, the lowest in 15 months. By comparison, the 52-week average rate is 7.02%.
While this is still progress, homebuyers shouldn’t expect property owners to break free from their golden handcuffs yet.
Homeowners unwilling to trade their mortgages
One of the biggest problems in today’s housing market is the sizable gap between current mortgage rates and the ones that homebuyers obtained more than three years ago.
According to a recent report by Creditnews Research, nearly two-thirds of U.S. mortgages were financed at less than 4%.
As Realtor.com explained, most homeowners are unwilling to trade their ultra-low mortgage rate for a higher one, so “they’re tied to their properties by golden handcuffs” that prevent them from selling their home.
The profound effect of the "golden handcuffs" is also evident in a recent Federal Housing Finance Agency (FHFA) report.
Its research shows that homeowners are 18.1% less likely to sell their homes for every additional point that mortgage rates rise over the one they obtained.
“We’re in a somewhat unprecedented period of how far away peoples’ fixed mortgage rates are compared to the fixed mortgage rates they could get today,” said FHFA economist Jonah Coste.
Coste explained that this reality is “going to keep a lot of people from selling.”
Bank of America strategists believe it could take six to eight years for the gap between current mortgage rates and “effective” mortgage rates to narrow.
In the meantime, Bank of America warns of a “dearth of transactions in existing homes.”
More from Creditnews:
- Commercial real estate foreclosures spiked to a decade-high
- The upside of recession? Mortgage rates plunge to 15-month lows
- Homebuyers are backing out of their deals at a record pace
- Are starter homes now a luxury? Entry-level homes hit $1M in 237 US cities
- Regional banks sell underwater bonds, betting on Fed rate cuts
- Luxury home prices soar to record high $1.18 million
- Home listings are rising fast but nobody wants them, Fannie Mae says