The Fed just fired the first shot in what could be a long campaign of rate cuts. On the surface, it looks like a win for everyone; stocks, gold, crypto, and housing are all sitting at or near record highs. Looks like a big win for asset holders, but dig deeper and the picture isn’t so simple.
Powell made it clear, for the first time I could ever remember, that these rate cuts are not about inflation. Inflation is still running well above 2.9%, and historically, the Fed only cuts rates once inflation is coming down. Here is where it is the 'historic' title of this blog comes from, this is the first cut in over 30 years with inflation this high. What appears to have changed is the Fed’s priority. They’re now cutting rates to protect jobs, not prices. A. shift that could have big implications for housing.
Let’s be clear: these cuts are not going to “fix” housing. Mortgage rates already dropped in anticipation of these cuts, but demand hasn’t moved. You can get a mortgage in the high 5's and if you can use a VA loan, it's even lower. Buyers aren’t rushing back. Why? Because millions of homeowners are still locked into 3% mortgages and prices are still at all time highs. Affordability has barely moved. Unless rates drop low enough to bring those buyers back into the market, good supply & buyer demand remains tight. Maybe that number is 5.5%, maybe 5%, maybe 4%. Nobody knows.
Meanwhile, prices are still at record highs. Even if they came down 10 to 20%, we’d just be back at 2022–2023 levels after two years of rapid appreciation. Buyers want deals and what I am constantly seeing for homes that are not struggling to sell, is that if the price is 10% lower, it will sell. Not always, but that house that's been on the market for months at $2MIL, will very likely sell at $1.8MIL. That might be the kind of relief buyers are hoping for.
This Fall market has sluggish at best. My blog last week calling it a buyers market seems to becoming the main narrative amongst my peers, who were doing their best to feign like these rate cuts would save the market. With that said, some homes still spark multiple offers, but that’s the exception. It's a market of have's and have nots. More listings are lingering. Sellers are having to adjust expectations, give concessions, and accept contingencies.
How does a soft market actually look for sellers? This past spring, I met with a seller where the strategy was to list at $1.1 million and expect multiple offers pushing closer to $1.2. Today, we’ll list at $1.1 and if we get it, we’ll be thrilled. Too many bad variables out there to feel super confident and if we are on the market after a few weeks, we should not be surprised. That’s the definition of a softer market.
Rate cuts will help certain parts of the economy—commercial real estate refinancing, people stuck with 7–8% mortgages, even the federal government rolling over its debt. But for residential buyers and sellers in Northern Virginia, it doesn’t mean a flood of new demand.
If we do slip into stagflation (rising inflation with a slowing economy) then the housing market gets even trickier. The one thing you shouldn’t buy into is the narrative you’re hearing from so many agents online. Rate cuts are not a godsend for housing. They are now a tool to hedge against a weak jobs market. Remember, rates can be low but people don't buy if they don't have a job!