The US housing market just had its worst spring selling season in a dozen years.

The major question now is whether the Federal Reserve can orchestrate a soft landing that keeps the economy strong while also dropping rates enough to jump-start the stalled housing market.

“The good news is that rates will most likely be lower next spring. The big question is why they’re lower,” said Scott Buchta, head of fixed income strategy for Brean Capital. “If rates are lower because the economy is slowing, home prices might get hit by consumer confidence. Then the question is: ‘Do I want to take a bigger mortgage? How stable am I in my job?’”

Rates on a 30-year fixed mortgage have fallen nearly 160 basis points from a recent peak in October 2023, and expectations are building that the Fed’s meeting this month could shepherd in even lower borrowing costs. That may ease the affordability crunch that drove average monthly sales in April through June to the lowest level for that period since 2012, according to Redfin Corp.

The spring is the key season for the housing market, when warmer weather draws out more buyers and sellers. But this year, there was a shortage of both. Many renters are priced out of homeownership and owners who might like to move have held off from listing in order to hang on to rates secured when borrowing costs were cheaper.

The so-called “lock-in effect” prevented the sale of about 1.7 million homes between the second quarter of 2022 and second quarter of 2024, according to an August report by the Federal Housing Finance Agency.

Some of the biggest drop-offs in spring sales this year were in once-hot Sun Belt states. In a Redfin analysis of the top 50 US housing markets, cities in Florida and Texas had the steepest percentage declines in transactions this April through June, compared with the same period of 2023.

While many house hunters are biding their time until mortgages get cheaper, buyers who are shopping now are being picky. In Phoenix, Realtor Sheryl Bowden is warning her seller clients that their properties will sit on the market without necessary updating, so she’s urging them to freshen their cabinets and install new flooring while they wait.

“Buyers are definitely demanding that sellers put their best foot forward,” said Bowden, president of local trade association Phoenix Realtors. “The day you remodel your house it’s out of style.”

One client ignored her advice to install luxury vinyl plank flooring instead of carpet in his condo, because adding vinyl would triple the cost. His condo’s gone unsold for about 130 days.

“People were like, ‘Yeah, it shows nice, but I don’t love it,’” she said.

Lower Rates
The Mortgage Bankers Association said it expects rates to end this year roughly flat at 6.4% and finish next year around 5.9%. While that’s hardly the sub-3% days of years past, National Association of Realtors Chief Economist Lawrence Yun said that should help juice housing sales to a “meaningful” degree.

But if the Fed starts aggressively cutting rates, that could signal that the US economy is more unstable than previously thought. For housing, it’s better for the economy to remain strong, according to University of Pennsylvania’s Wharton School Professor Benjamin Keys.

“In a soft landing, rates wouldn’t come down that far — that’s the trade,” Keys said. “But the pain of a recession, with a huge increase in unemployment, would be dramatically more painful.”

While policymakers have signaled that the time to cut rates has come, exactly how much they reduce rates over the course of the year remains unclear.

Recent jobs data are starting to point to some risks of weakness in the economy. US hiring in August missed forecasts, and a Fed survey of regional businesses indicated employers have become more selective in hiring in recent weeks.

Mortgage rates, and the government bonds that guide them, have already been reacting to expectations of Fed cuts. That’s helped push a measure of the average rate on a 30-year fixed mortgage down to 6.2%, the lowest since February 2023, according to Freddie Mac.

Waiting Game
Potential buyers may still be holding off because of the expectation that rates will fall further, according to Redfin Chief Economist Daryl Fairweather. And while inventory remains tight, the few listings that are available are getting stale.

“I don’t think people will be enticed to buy until there is more fresh inventory that will probably start coming in 2025,” she said. “I expect things to heat up next year if rates keep coming down.”

Eventually, more demand will be unlocked, Fairweather said.

“Once some buyers jump in to take advantage of lower rates, other buyers will follow suit,” she said. “They’ll see more competition and instead of being hesitant because they expect rates to drop more, they’ll be nervous that they aren’t acting fast enough before prices go up.”

Affordability Challenge
A drop in borrowing costs – especially a modest one – may not be enough to solve an affordability crisis that’s been worsened by years of underbuilding and surging prices. The high cost of housing has become a rallying cry, pushing local mayors and presidential hopefuls alike to act. Candidates Kamala Harris and Donald Trump each have proposals.

In cities such as Phoenix, high home prices have created a huge generation gap, with affluent Baby Boomers tapping their home equity to buy properties with cash, while younger buyers are priced out.

The median single-family sale price in Phoenix through the first eight months of the year was $476,990, up 4.8% from the same period last year.

“For the median price you’re looking at, that’s a $3,000 house payment you’re making,” said Bowden.

This article was provided by Bloomberg News.