Could a Fed rate cut intensify housing market bidding wars?

Low supply and a higher number of eligible homebuyers could spur greater homebuying competition

Could a Fed rate cut intensify housing market bidding wars?

Mortgage market watchers continue to keenly await the first sign that the Federal Reserve is lining up an interest rate cut – but policymakers still seem to be in no rush to start bringing borrowing costs lower.

Inflation has been on a steady descent from its 39-year high of 9.1% in 2022, but Fed officials suggested on Tuesday (May 21) that much more evidence was required to be sure a resurgence of price growth wasn’t possible.

Speaking in Washington before the Peterson Institute for International Economics, Fed governor Christopher Waller said that could mean “several more months” of positive news on the inflation front before rate cuts could be considered.

Susan Collins, president of the Fed in Boston, said at an Atlanta Fed conference that “mixed” recent inflation data showed the battle to reach the central bank’s 2% target was “going to take longer than I had previously thought” – and Cleveland president Loretta Mester also said she expected a months-long wait for lower rates.

Last week, new Bureau of Labor Statistics figures showed the consumer price index (CPI) for April rose by 3.4% on an annual basis, meeting analysts’ expectations, although it also ticked up by 0.3% compared with the previous month.

High mortgage rates continue to keep market cooler

The Fed’s reticence to start cutting rates has helped keep mortgage rates high, with the benchmark 30-year fixed-rate loan seeing its rate increase for five of the past six weeks and remaining resolutely above 7%.

It’s also kept a lid on the housing market, with many buyers remaining on the sidelines as they wait for the first inkling that the Fed could be prepared to cut.

The National Association of Realtors (NAR) said on Wednesday (May 22) that existing home sales unexpectedly dropped in the US last month, falling by 1.9% nationally and coming in lower across each part of the country.

While a rate drop would be welcomed by the mortgage industry, it wouldn’t necessarily be the catch-all cure for the current challenges facing homebuyers, according to a leading executive.

Clint Bryant (pictured top), vice president and senior loan officer at MarveLoans, told Mortgage Professional America that a Fed rate cut could also serve to heat up the housing market and push affordability even further out of reach for some buyers.

“House prices are appreciating still, even with the higher rates. And I think it just has to do with the supply and demand of everything that’s available in the current market as it stands right now,” he said.

“If anything, lowering the interest rates could potentially make things even more challenging, just because it’s going to introduce more purchasers… and then it just makes it even that much more competitive.”

Supply shortage sees competition remain elevated in certain markets

A recent NAR/ report showed that buyers across all income levels would have greater choice in the US housing market if interest rates fall – but did not reference the prospect of bidding wars heating up as more buyers enter the fray.

Recent months have seen brokers and other mortgage professionals report multiple offers and plenty of competition for homes even amidst a supposedly subdued climate and affordability woes.

That’s partly because of a housing supply crisis that saw the number of months of available inventory fall to a new record low of 1.6 months in January 2022, with that figure not increasing enough in the ensuing years to keep up with demand.

All that points to the prospect of lower rates simply pushing up competition for properties on the market even further, suggested Bryant.

“It may sound up front like it’s going to be good news, having lower interest rates. If the cost to borrow money is cheaper for consumers, it’s typically a good thing,” he said. “But I think it could prove more challenging to get those now-qualified borrowers into a home, just because that would make the market even more competitive than it currently is right now, too.”

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