Last week, the Federal Reserve cut its benchmark rate by a quarter percentage point, a move intended to counter signs of a looming economic slowdown.
But don’t expect the housing market to blossom in response, says a recent article in The New York Times.
While cheaper mortgages usually give the housing market a notable boost, the Times says that’s unlikely to happen this time around thanks to rising home prices and a growing affordability problem.
Even though home-price growth has slowed sharply in recent months, it is still gaining nationwide, and this has had a ripple effect.
Existing home sales are down 2% from last year, residential real estate investments have been declining for the past 18 months, and sales of new builds have been trending downward, the article points out.
Since 2009, median home prices have risen nearly 60%, far outpacing simultaneous wage growth, Times writer Matt Phillips states, claiming that “the math facing prospective American homebuyers is daunting.”
On top of that, homebuilders are not building enough lower-priced, entry-level homes to support a market of first-time Millennial homebuyers. This pushes prices up for the limited inventory that does exist and shuts a sizable portion of young Americans out of the market.
The situation has given rise to a major affordability problem that will require much more in-depth problem solving.
“It will take more to trigger a significant wave of home buying than clipping a percentage point off mortgage rates,” Phillips writes.
The article says that so far, the market’s response to the rate cut has been decidedly “muted” compared with past instances, and this does not bode well for the Fed’s power to jumpstart the housing market with a little rate tweaking.
“The lackluster response to lower mortgage rates highlights a broader challenge facing the Fed as it tries to nudge the American economy along by cutting interest rates,” the Times states. “It might take a sustained program of rate cuts – rather than a couple of reductions, as many analysts expect – for the Fed to have a true impact on the economy.”
