Survey Reveals How Deep Federal Reserve Must Cut Interest Rates To Lure Homebuyers Back Into The Market – Right Now It's Not Even Close

Real estate investors and prospective homebuyers spent much of 2024 waiting for a drop in interest rates. Now that the Federal Reserve has cut rates twice, the next question is how much lower rates must go to get buyers off the sidelines and back into the housing market. A recent survey by CNET answered that question, and the Fed's cuts aren't even close.

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CNET's survey didn't just deal with interest rates. It queried Americans on several housing and housing affordability-related issues and the findings were quite revealing. First, the current pace or size of the Federal Reserve's rate cuts would have to increase dramatically before people feel comfortable buying again. Less than 5% of survey respondents said they would feel at ease financing a house at a 6% APR.

However, more than half of those respondents indicated they would be much more amenable to a home purchase if the APR was 4%. That's good to know, but the news will probably be cold comfort to homebuilders because it could take years before the Federal Reserve lowers interest rates enough for people to get 30-year mortgages in the 4% range again. The truth is that mortgage interest rates may never go that low again.

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Interest rates were only as low as they were for so long because the Federal Reserve was trying to spur an economic recovery from the great financial collapse 2008. If COVID-19 hadn't come along and delayed the inevitable, it's quite likely the Fed would have raised interest rates much sooner. However, the rapid appreciation of property values nationwide means a 4% mortgage would save borrowers hundreds of thousands in interest payments.

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Another revealing survey conclusion is that home prices have gone so high that almost 30% of respondents said no mortgage rate would be low enough to entice them to purchase a home or refinance their current property. Nearly half (45%) of the survey respondents said lower home prices might motivate them to enter the housing market.

 So, even if the Federal Reserve cut rates to the 4% threshold, millions of Americans would still stay out of the housing market. As for the "middle ground" between 4% and 5% APR, only 9% of survey respondents indicated they would be willing to buy or finance at 5%. This sentiment can't come as a surprise. Housing affordability and how to increase it has been a topic of heated debate in city halls, state houses, and the halls of Congress. 

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That's part of why Fed Chairman Jerome Powell recently admitted that cutting rates can only go so far in healing America's housing market. The bottom line is that housing prices aren't coming down until more affordable housing stock is available. The good news is that lower interest rates should bring down borrowing costs for homebuilders, which should result in some price relief. In the meantime, 4% mortgages are relics of the good old days.

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