The State of US Housing Supply: A Look at Inventory and New Construction

An interest rate cut by the Federal Reserve is a significant event, and many are hoping it will provide a much needed boost to the cooling US housing market. The Fed's decision to lower its benchmark rate by a quarter point is aimed at managing a softening labor market, but its impact on home buyers and sellers is not as direct or immediate as it may seem. While the move signals a potential easing of monetary policy, the housing market's future will be determined by a complex interplay of factors beyond just interest rates.

The Federal Reserve does not directly set mortgage rates. Instead, the central bank’s decision to cut its federal funds rate indirectly influences mortgage costs, which are more closely tied to the yield on the 10 year Treasury note. In a forward looking market, the anticipation of a rate cut often causes mortgage rates to fall before the official announcement is even made. This has already been the case, with average 30 year fixed mortgage rates recently hovering around a near year low of 6.30%. This preemptive market movement can lessen the noticeable impact of the official rate cut on new loans, as much of the change has already been priced in.

The current housing market is in a state of transition. While home prices have seen modest year over year gains of about 1.6%, the number of homes sold has declined. Despite an increase in overall inventory, a true balance between supply and demand has yet to be achieved in many areas. For potential homebuyers, a sustained decline in mortgage rates would improve affordability by lowering monthly payments, which could attract more buyers back into the market and lead to an increase in sales activity. This would be a welcome change after years of elevated rates priced many out.

A series of rate cuts over time could have a more significant impact. It could not only increase buyer confidence but also boost builder confidence. Lower interest rates on construction loans could spur new home building projects, helping to alleviate the persistent housing shortage. This would add to the existing inventory and potentially stabilize or even moderate home price growth in the long run. The Fed's signaling of more potential rate cuts in the future provides a hopeful outlook for the housing sector. However, this positive momentum is contingent on inflation remaining under control and the broader economy avoiding a downturn that could negatively affect employment.