Housing Market Eyes Relief As Weak Job Numbers And 4.1% Unemployment Hint At 'September Rate Cut'

The housing market may soon catch a break. The latest employment data suggests the Federal Reserve could cut interest rates as early as September 2024, potentially easing the burden on homebuyers grappling with high mortgage rates.

The recent jobs report showed an unexpected uptick in the unemployment rate to 4.1% in June, up from 4.0% in May. While the economy added 206,000 jobs, slightly above expectations, the report points to a gradually cooling labor market — a key factor in the Fed’s decision-making process.

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Chen Zhao, an economist at Realtor.com, said, "The jobs report, along with the past two months of inflation data, puts the Fed on a solid path to a September rate cut, but there are three inflation reports before then."

The softening job market, evidenced by the creeping unemployment rate and moderating wage growth, could be the turning point many in the housing sector have been waiting for. Average hourly earnings rose 3.9% year-over-year in June, the lowest reading in years, suggesting employers are no longer scrambling to attract workers with hefty pay increases.

Prospective homebuyers have been sidelined by a combination of high home prices and mortgage rates hovering around 7%. A Fed rate cut could translate to more affordable borrowing costs. Currently, Wall Street is pricing in two quarter-point cuts by year’s end.

Zhao noted, "The next CPI report will be released on July 11. If that report comes in largely as expected, the Fed should be able to start laying the groundwork, perhaps as soon as their July 31 meeting, for rate cuts to start in September." Zhao added that if Thursday's inflation data is weak, this month’s rate cut may not be fully off the table.

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However, the path to lower rates is not without potential hurdles.

Fed officials have indicated that weakening the labor market could prompt them to cut rates. While the current slowdown may not yet meet the threshold, it’s moving in that direction. The gradual cooling, rather than a sharp decline, may be preferable for the housing market, allowing for a smoother transition to lower rates.

The Fed has made it clear that inflation remains its primary concern. Three more inflation reports are due before the September meeting, and their outcomes could sway the central bank’s decision.

Zhao said the jobs data "further solidifies the expectation of lower mortgage rates to close out the year" for homebuyers. That potential easing in borrowing costs could provide a much-needed boost to a housing market muted by affordability challenges.

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