On this show, we’ve often discussed the impact of interest rates on home values and reverse mortgage lending. So this begs the question would lower interest rates spur another boom in home values? Not necessarily. Here’s why…

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The Federal Reserve is well aware that real estate is a major driver of our overall economy and sees the logjam of housing inventory and record low home sales. “It’s a question of when (mortgage) rates will start to drop meaningfully, not if they will”, says Melissa Cohn, vice president of William Raveis Mortgage. Before we continue please press the like and subscribe to our channel.

It seems counterintuitive to say that lower mortgage rates could push home values down to more affordable levels. After all, the Fed’s near-zero fed funds rate and home mortgage rates as low as three percent fueled a historic boom in home values. But let’s look back at when the Fed has dropped interest rates. In the early 1980s, the price of oil surged in the wake of the Iranian Revolution and the Fed’s recent tight monetary policy led to another recession. Another recession followed from July 1990 to March of 1991 and the Fed responded with another series of rate cuts. A brief recession followed the dot-com bubble and the September 11th 911 attacks and the Fed once again cut rates. Then came the Great Financial Crisis of 2008. As unemployment surged and the economy teetered on collapse the central bank once again cut the fed funds rate to nearly zero where it remained for a record seven years. Most recently the Covid-19 pandemic triggered a very short recession from February 2020 to April of that year and once again rates were slashed to near zero. Seeing home values rising to astronomical levels and inflation surging the Fed reversed course raising interest rates at a historic pace.

So what if the Fed reverses course again and slashes rates in 2024? “A recession in 2024 would likely weaken housing demand beyond its current low level, and if it were significant enough, it could stress existing homeowner finances enough to prompt some to sell, reversing the supply-demand balance that we’ve seen in the last few years”, said Danielle Hale, Realtor.com’s chief economist. 

This makes sense since the National Association of Realtors reports nearly 82% of would-be homebuyers feel the golden handcuffs of their existing low-rate mortgage. What’s the magic interest rate that could clear the logjam of the housing inventory of reluctant sellers and discourage potential buyers? 5.5% reports NAR. And with affordability being the biggest barrier seventy-one percent of potential homebuyers report they won’t accept a 30-year mortgage rate above 5.5%. They may get their wish if UBS’s projection comes to pass. The European Bank predicts the Fed will slash the fed funds rate by 2.75% in 2024 ultimately plunging to 1.25% by the first half of 2025.  This stands in stark contrast to the majority of economists who expect only a 75 basis point reduction in the fed funds rate next year. 

The good news is that both 30-year fixed-rate mortgage rates and the 10-year Constant Maturity Treasury rate which impacts Home Equity Conversion Mortgages have dropped significantly. 

Today housing experts and economists are closely monitoring mortgage foreclosures and delinquency rates- a trend that would certainly increase in a recession.  What remains to be seen is if a dramatic reduction of interest rates in 2024 will increase housing inventory and lower prices or if it will spur another uptick in home values. What is certain is the housing market is in a period of volatility. Where do you see home values heading if interest rates are cut significantly in 2024? Let us know in the comment section below. 

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