Jerome Powell says the Fed can cut rates but it can’t fix the housing crisis

During a post-meeting press conference, Fed Chair Jerome Powell was asked whether interest rate cuts would reignite demand in the housing market and push prices higher again. His response was revealing: while a drop in mortgage rates could ease the "lock-in effect"—where homeowners are reluctant to sell due to high rates—it’s uncertain how much additional demand rate cuts would generate. To Powell, this doesn’t address the root of the nation’s housing crisis.

“The real issue with housing is that we have had, and continue to have, a shortage of housing, and it’s going to be a challenge,” Powell said. “It’s hard...to zone areas where people want to live. Every aspect of housing has become more difficult, and the question remains: where will the supply come from? That’s not something the Fed can fix.”

He added, “But I think as we normalize rates, you’ll see the housing market stabilize. Ultimately, by bringing inflation down and normalizing rates, the housing cycle will also normalize, which is the best thing we can do for households. The supply issue, however, will have to be addressed by the market and government.”

It’s noteworthy because while the Fed doesn’t directly set mortgage rates, it does influence their direction. For example, mortgage rates are unlikely to drop sharply after the latest decision because they’ve already fallen, with expectations of rate cuts factored in. However, lower rates are still anticipated.

When the pandemic began, the Fed slashed interest rates in emergency cuts, which caused already low mortgage rates to fall further, fueling a housing boom. But as inflation became a concern, the Fed raised interest rates, causing mortgage rates to surge, bringing the housing market to a standstill. Last year, existing home sales fell to their lowest in nearly 30 years. In August, sales dropped another 2.5% from the previous month and 4.2% compared to a year ago.

While the Fed’s actions can influence housing demand temporarily, as Powell emphasized, it doesn’t address the deeper issue of housing supply.