It has finally come. On Sept. 18, the Federal Reserve announced an interest rate cut of half a percentage point. While a quarter of a percentage point was all but expected, the larger rate cut took many by surprise. It indicates the Fed’s urgency in lowering borrowing rates, and its confidence in inflation’s downward track. The big question is, how will the rate cut affect consumers? And how might it impact the housing market?

Since 2023, 30-year mortgage rates have hovered around 6 to 7%, with a 23-year high of 7.79% in October. Many interested buyers were forced to take the sidelines, facing hundreds of extra dollars in mortgage payments a month. Then, in mid-September, the rate dropped to its lowest level in two years -- 6.15%. This drop preceded the Fed’s rate cut, demonstrating the power of market expectations.

All signs—falling inflation and a slowdown in hiring— pointed to a rate cut, bolstering expectations. But, as the market expected a cut of only a quarter of a percentage point, the full impact of the Fed’s decision is yet to be seen.

One possible outcome is mortgage rates that continue to fall in the weeks ahead on the expectation of more rate cuts. Indeed, the market is expecting Fed funds to fall another 1.5% by the end of 2025. Lower interest rates offer clear benefits. Smaller monthly payments could sway some potential buyers, making previously unaffordable properties affordable.

Those looking to refinance, as well, could be looking at saving hundreds of dollars a month. However, some buyers may delay home purchases in the hope of even lower rates to come.

Long-term, the outlook is murkier. If rates continue to fall, more buyers could flood the market, driving already high home prices up even further. This could keep home-buyers in a tough spot, with high prices dampening the effect of lower rates. At the same time, dropping rates could increase the supply of homes, potentially lowering housing prices.

High home prices have largely been caused by a lack of supply— the United States is lacking millions of housing units. High interest rates made the problem worse, as the Fed rate impacts rates for home constructions. Pricier construction put pressure on inventory, making it difficult for developers to keep up with demand. Now, with dropping rates, developers should be able to build more homes. This increase in supply could lower housing competition and put downward pressure on prices. But it might take years for construction to catch up.

According to another school of thought, mortgage rates will not budge much for the remainder of the year; some economists believe the drop in rates has already been priced in. It is also possible not much will change due to the rate decrease. Despite the recent cut, mortgage rates are still significantly higher than they were during the pandemic, when lots of homeowners refinanced. Those homeowners now are locked into low rates, and many of them would be hesitant to sell their homes and gain a higher mortgage rate today.

While lower rates could motivate some looking to move, they just are not low enough to reduce the widespread allure of cheaper mortgages. According to a study by Wharton finance professor Lu Liu, 1.8% may be the rate differential – the difference between a homeowner’s current mortgage rate and market rates – needed to motivate homeowners to sell their homes.

The more people do not sell, the more housing inventory remains small— meaning nothing has really changed for supply and demand. This will keep home prices high.

At this stage, the rate cut—and potential future cuts— could impact the housing market in a variety of ways. The full effect remains to be seen.

Steve Kim offers securities and investment advisory services through Gradient Securities, LLC. Member FINRA/SIPC. Gradient Securities, LLC offers investment advisory services under the d.b.a. of Gradient Wealth Management. Gradient Securities, LLC, and its advisers do not render tax, legal, or accounting advice. Brady Associates Asset Management is not affiliated with Gradient Securities, LLC.