Here are 4 ways the Federal Reserve's big rate cut could change the housing market

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

That will have an impact on the housing market — but it's unlikely to make a huge difference for those struggling to afford a home.

Let's take a look.

Mortgage rates might not actually drop much further right now

Mortgage rates have been pretty high for the last couple of years, especially compared with the historic lows they reached during the peak of the COVID-19 pandemic.

Rates bottomed out below 3% for a 30-year fixed-rate mortgage during 2020 and 2021 when the pandemic led to lockdowns, but they then climbed to nearly 8% last year amid a robust economy and rising inflation.

But the prospect of rate cuts has already helped send mortgage rates lower, even before the Fed announced its actual decision on Wednesday. Long-term fixed-rate mortgage rates are now at 6.2%, the lowest since February 2023. (It's worth noting, though, that other factors besides the Federal Reserve's benchmark interest rate influence mortgage rates, including economic conditions.)

This means effectively that the rate cut announced by the Federal Reserve may already be priced in — though mortgage rates are bound to fall a little more given that policymakers have made clear they intend to continue cutting interest rates into next year.

Charlie Dougherty, a senior economist at Wells Fargo, expects mortgage rates to drop "marginally" after the Fed's rate cut on Wednesday.

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

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

Lower mortgage rates could actually mean higher housing prices

Here's the thing: Lower mortgage rates may not make it easier to buy a home. In fact, it could make it more difficult and lead to higher home prices.

That's because lower mortgages are likely to lure more buyers back to the market, bringing in more competition for a limited supply of houses.

That's tough for first-time homebuyers. Kim Kronenberger, a real estate agent in the Denver area, says she worries for the would-be homebuyers who keep waiting for affordability to improve.

These buyers have struggled to find their first home as many were scared off by bidding wars during the low-interest-rate era — and then were rebuffed by high mortgage rates and still-high prices.

"A lot of those buyers, they absolutely have regret," she says of people who didn't buy a home at the start of the pandemic, when rates were low but home prices hadn't yet skyrocketed. "Because had they bought four years ago, they would have been in a whole different place than they are now."

Don Payne, a real estate agent in Columbus, Ohio, says there's more inventory of larger homes for homebuyers trading up: "Builders are building them, and existing homeowners have those too."

The big problem is a lack of starter homes.

"Folks are trying to get their first house, and there's a huge shortage on that," he says.

Dropping interest rates could lead to more housing supply

A key reason for high home prices currently is the lack of housing supply: The U.S. is short millions of housing units. Supply has not kept pace with demand, especially as the large millennial generation is forming households and trying to buy homes.

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

So this rate cut should make it easier for those developers to get building again.

The fact that lower mortgage rates are expected to spur more homebuyers to buy will also serve as an incentive for builders to get building.

That's good news for the supply side of the housing equation — more homes getting built and into the market will relieve some of the demand that pushes up prices. But, of course, it will take time for those homes to be completed.

Affordability will still be a big problem

Lower mortgage rates can certainly bring down a homebuyer's monthly mortgage payment. But when home prices are sky-high, it will still be hard for many people to find a home they can afford.

Dougherty, the Wells Fargo economist, says home prices have risen by about 50% since early 2020, faster than average household income growth during that time.

"That has been a really big driver in terms of making housing out of reach for a lot of prospective buyers," he says.

During the pandemic, a huge 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 those homeowners are unlikely to refinance again.

In fact, most homeowners are still going to be reluctant to sell their current home because they would face a higher mortgage rate today. Lower interest rates will somewhat reduce what's called the "lock-in effect," but they won't change homeowners' hesitation.

Greg McBride, chief financial analyst at Bankrate.com, notes that even as mortgage rates have come down in recent weeks, it hasn't really jump-started the housing market.

"Home prices are still at record highs, and inventory remains below pre-pandemic levels," he says. "Neither of those variables are likely to improve dramatically in the near term."

In other words: It will take more than the Fed's rate cut to fix America's housing problems.