Massachusetts Senator Elizabeth Warren has urged Federal Reserve Chair Jerome Powell to cut interest rates to improve housing market affordability. In a letter, Warren and three fellow Democratic senators urged Powell to consider cutting rates sooner than later, citing the affordability crisis in housing.
In the letter, dated Jan. 28, Warren, alongside Colorado’s John Hickenlooper, Nevada’s Jacky Rosen and Rhode Island’s Sheldon Whitehouse, claim high lending rates are overly burdensome to potential homebuyers.
“High interest rates have aggravated the country’s persistent crisis of housing access and affordability,” the senators wrote. “As the Fed weighs its next steps in the new year, we urge you to consider the effects of your interest rate decisions on the housing market and to reverse the troubling rate hikes that have put affordable housing out of reach for too many.”
Warren has been a famous and frequent opponent of the central bank’s rate-hike campaign over the past two years. Ahead of the first Federal Open Market Committee (FOMC) meeting of the year, set for Jan. 30-31, it makes sense for Warren to make a pointed statement on the matter.
What Do Lower Interest Rates Mean for the Housing Market?
Warren’s case isn’t without precedent. Over the last two years, the Fed raised the benchmark rate to a range between 5.25% and 5.5% as part of its ongoing war on elevated inflation. That is the highest level in more than two decades.
These rate hikes have proven detrimental to housing affordability, which had already slowed following the historic price boom stemming from the Covid-19 pandemic. Indeed, 30-year fixed mortgage rates soared to nearly 8% in October 2023.
Last August, the National Association of Realtors (NAR) Housing Affordability Index fell to its lowest recorded level, 91.7. For context, an index rating below 100 means a median-income family cannot afford a home under standard mortgage conditions.
That said, things have been slowly improving. With the Fed hinting at three or more rate cuts in 2024, 10-year Treasury yields — which mortgage rates closely follow — have eased notably. As a result, the 30-year fixed rate is well below last year’s peak, trending around 6.9%.
Should the benchmark rates fall, mortgage rates will likely follow suit, if only mildly. Though, when rates fall, the demand for homes will likely rise, leading to higher home prices. Therefore, there may be more of a tradeoff in the affordability equation rather a huge outright improvement.
“As interest rates inevitably decline (it’s a matter of when not if), we can expect demand to surge. The initial drop in interest rates will entice first-time buyers and those without low mortgage rates to reenter the market, creating an increase in demand before a corresponding increase in supply,” Jard Antin, Managing Director at Elegran, told CBSNews.
That said, some economists believe there is a pent-up supply of sellers just waiting for rates to fall enough to justify dropping their pandemic-era mortgage for a new property. As this inventory is unleashed, home prices could see meaningful moves downward.
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
