Lower mortgage rates are expected to encourage more buyers to enter the housing market. Here’s a home listed for sale in Los Angeles last month.

Patrick T. Fallon/AFP via Getty Images

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Patrick T. Fallon/AFP via Getty Images

After months of anticipation, the Federal Reserve cut interest rates by half a percentage point on Wednesday.

That will have an impact on the housing market, but it probably won’t make a big difference for people who struggle to afford a home.

Let’s take a look.

Mortgage rates may not fall much further at this point

Mortgage rates have been quite high in recent years, especially compared to the historic lows they reached during the height of the COVID-19 pandemic.

Interest rates hit a low of below 3% for a 30-year fixed-rate mortgage in 2020 and 2021 as the pandemic led to lockdowns, but rose to nearly 8% last year amid a robust economy and rising inflation.

But the prospect of rate cuts is already helped drive mortgage rates lower even before the Fed announced its actual decision on Wednesday. The long-term fixed-rate mortgage rate is now at 6.2%, the lowest since February 2023. (It’s worth noting, however, that factors other than the Federal Reserve’s benchmark rate are at play mortgage rates, including economic conditions.)

This effectively means that the Federal Reserve’s announced rate cut may already be priced in, although mortgage rates are likely to fall somewhat further as policymakers have made it clear that they plan to continue cutting interest rates into next year.

Charlie Dougherty, senior economist at Wells Fargo, expects mortgage rates to fall “marginally” after the Fed’s rate cut on Wednesday.

He and his colleagues predict that the average rate on a 30-year fixed-rate mortgage will be about 6.2% by the end of this year, which is what it is now.

However, Dougherty expects 30-year mortgage rates to fall closer to 5.5% by the end of 2025, still above pre-pandemic levels.

Lower mortgage rates could actually mean higher house prices

The point is, lower mortgage rates may not make it easier to buy a home. In fact, they may make it harder and lead to higher home prices.

This is because lower mortgages are likely to attract more buyers to the housing market, creating more competition for the limited supply of homes.

That’s tough for first-time homebuyers. Kim Kronenberger, a Denver-area real estate agent, says she worries about potential homebuyers who are holding off until affordability improves.

These buyers have struggled to find their first home, as many of them… deterred by bidding wars during the low interest rate era, and then repulsed by high mortgage rates and still high prices.

“A lot of those buyers are really regretting it,” she says of people who didn’t buy a home at the start of the pandemic, when interest rates were low but home prices hadn’t yet skyrocketed. “Because if they had bought four years ago, they would be in a very different situation now.”

Don Payne, a real estate agent in Columbus, Ohio, says there’s more supply of larger homes for homebuyers who want a bigger house: “Builders are building them, and existing homeowners have them, too.”

The big problem is the lack of starter homes.

“People are trying to buy their first home, but there is a huge shortage of that,” he says.

Falling interest rates could lead to increased housing supply

A major reason for the current high housing prices is the lack of housing supply: the U.S. is short millions of homes. Supply has not kept up with demand, especially as the large millennial generation forms households and tries to buy homes.

High interest rates didn’t help, which is why it is becoming harder for some homebuilders to get projects off the ground, especially smaller, private developers. That’s because the interest rates on loans that builders get for acquisition, development and construction are tied closely to the rate set by the Fed.

This rate reduction should make it easier for project developers to start building again.

In 2022, new homes will be completed or under construction in Trappe, Maryland. Lower interest rates and an expected increase in buyer demand will likely lead to more home construction.

Jim Watson/AFP via Getty Images/AFP

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Jim Watson/AFP via Getty Images/AFP

The fact that lower mortgage rates are expected to encourage more home buyers to buy will also provide an incentive for builders to get building.

That’s good news for the supply side of the housing equation: more homes being built and coming onto the market will alleviate some of the demand that’s driving up prices. But of course, it will take time for those homes to be ready.

Affordability will still be a major issue

Lower mortgage rates can certainly lower a homebuyer’s monthly mortgage payments. But when home prices are sky-high, it will still be difficult for many people to find an affordable home.

According to Dougherty, an economist at Wells Fargo, home prices have risen about 50% since the start of 2020, faster than average household income growth during that period.

“That has been a huge reason for making homes unaffordable for many potential buyers,” he says.

During the pandemic, a large number of homeowners refinanced their mortgages to take advantage of record-low rates. Nearly 60% of active mortgages now have rates below 4% — rates so low that they are unlikely to refinance again.

In fact, most homeowners will still be reluctant to sell their current home because they will now be faced with higher mortgage rates. Lower interest rates will reduce the so-called “lock-in effect” somewhat, but will not change the hesitation of homeowners.

Greg McBride, chief financial analyst at Bankrate.com, notes that the housing market hasn’t really picked up, even as mortgage rates have fallen in recent weeks.

“Home prices are still at record highs and inventory is still below pre-pandemic levels,” he says. “Neither variable is likely to improve dramatically anytime soon.”

In other words, it will take more than just the Fed cutting rates to solve America’s housing problems.