Recent data has shown that many Americans, particularly frustrated millennials, are struggling to afford homes due to elevated home prices. However, there was some relief provided by the Federal Reserve on Wednesday when they decided to cut interest rates by 50 basis points, which will ultimately lower mortgage costs. Despite this move, it is unlikely to halt the continuous rise in home prices.
Federal Reserve chair Jerome Powell acknowledged that the main issue behind high home prices in the U.S. is the lack of supply, which is not something that the Fed can easily remedy. The current shortage of approximately 4 million homes in the U.S. is contributing to the imbalance between supply and demand, consequently putting upward pressure on prices.
The decision to lower the benchmark rate, bringing it to a range of 4.75% to 5%, is expected to make mortgages more affordable, potentially attracting buyers who were previously priced out of the market. Powell also mentioned that with rates dropping, more people are likely to start moving, which could have a positive impact on home sales.
Shelter costs, which represent a significant portion of total spending, are still high compared to the Fed's overall target of 2%, with a year-over-year increase of 5.2% as of August. Powell also noted that the recent slowdown in home and rent prices has not been fully reflected in the Consumer Price Index yet.
While Powell expressed confidence that housing inflation is easing, he also stated that it is uncertain how much additional demand lower rates will generate in the housing market or the effect it will have on home prices. Ultimately, the Fed's goal is to reduce inflation and normalize interest rates, leaving the issue of supply to be addressed by the market and government intervention.