A cut in federal interest rates won’t necessarily mean better mortgage rates or lower prices for Utahns looking to buy a home, industry experts say.
The Federal Reserve cut its benchmark interest rate on Wednesday for the first time in nine months and signaled further cuts are likely.
Historically, a Fed rate cut has led to mortgage rates dropping as yields drop on 10-year U.S. Treasury notes, said Dejan Eskic, a senior research fellow at the Kem C. Gardner Policy Institute.
“[But] the last couple of cuts we’ve seen, it’s actually done the opposite,” said Eskic, whose research focus includes housing, construction and real estate.
Mortgage rates are at their lowest point in nearly a year — but still far above pre-pandemic rates.
That’s because, Eskic said, the market anticipated the Fed’s actions and started cutting rates.
Still, homebuilders like Oakwood Homes are expecting a boost in buyer activity — like it did a year ago after rate cuts — as a result, said Malcolm Thacker, the Utah market president for the company that builds homes in Arizona, Colorado and Utah.
“It’s really just bringing people out,” Thacker said.
That demand can lead to supply issues, Thacker said, but Oakwood is prepared to help increase availability.
Fed rates are only part of the housing puzzle
The Fed cut reduces the federal funds rate — what banks charge each other for short-term loans — to between 4% and 4.25%, down from its prior range of 4.25% to 4.5%.
Federal Reserve officials are also penciling in two more rate cuts in 2025, and one in 2026, according to the central bank’s summary of economic projections.
But rate cuts are just one piece of the puzzle in how banks determine loan rates and could contribute to a trend of interest rates slowly decreasing over time.
The Fed’s action sets the federal funds rate, or the standard rate for how banks borrow money from each other. That means banks can consider charging customers a lower interest rate and still make a profit, because they are paying less to borrow the money in the first place.
It doesn’t always happen, though.
Jerome Powell, the Federal Reserve chair, acknowledged in a news briefing that while rate decisions can impact mortgage rates, the Fed would likely need to launch “pretty big” rate changes for it to matter “a lot” for the housing sector.
Mortgage rates did drop to a two-year low of 6.08% a week after the central bank cut rates almost exactly a year ago.
They didn’t keep falling as the federal rate dropped two more times, instead climbing until the average rate on a 30-year home loan reached 7.04% in January.
Thirty-year mortgage rates have fallen in small increments since, and sat at 6.26% as of last week, according to the Federal Reserve Bank of St. Louis.
That’s the lowest it’s been since October 2024, though it’s still more than 2 ½ percentage points higher than the week before the Centers for Disease Control and Prevention declared the first laboratory-confirmed case of COVID-19.
“It’s just messy, and I think people just get excited when you hear the Fed’s cutting rates,” Eskic said.
Buyers ‘frozen out’
There is reason for the excitement. Even small mortgage rate cuts, if they do happen, can save people thousands over the life of a home loan.
For example, a cut of 0.25% would save someone about $23,000 over 30 years on a $500,000 home, based on calculations by The Salt Lake Tribune that assumed a 20% down payment.
Mortgage rate increases have doubled the typical monthly payment for new homebuyers, Eskic said, from about $1,600 from mid-2018 to early 2021 to about $3,100 today.
“The high mortgage rates have frozen out homebuyers,” he said.
In contrast, a dip could affect demand, he said.
That could actually lead to higher home prices, in some cases, as supply can’t respond as quickly to the shift in rates, Thacker said.
Utah, for years, has faced a massive housing shortage compounded by high interest rates and a lag in construction. Projections from a year ago that Eskic helped create show the Beehive State will be 153,000 housing units short of demand by 2030.
Simply, there are not enough homes, condos and apartments in Utah. There is demand, but not enough supply as the state continues to grow.
That means homebuilders like Oakwood could face a big gap in supply if lower mortgage rates bring people off the sidelines.
The company is ready for more interest, Thacker said, especially from “first-time homebuyers and those who were ... waiting for signs of rate relief.”
Construction is still happening on homes in Oakwood’s 55+ community in South Jordan’s Daybreak neighborhood, he said, and there are almost 1,000 homes still ready to come online in a Saratoga Springs community called Wander.
The latter neighborhood has homes starting at just less than $400,000.
Oakwood is looking at other possible developments in Utah, Thacker said.
“We’re always looking to expand our footprint and give us opportunities to get more families in homes,” he said.
The homebuilder encouraged people to look at new construction homes because builders can offer low-interest loans and other incentives that private sellers can’t.
Thacker also echoed an often-repeated phrase in homebuilding: “Date the rate and marry the home.”
Generally, prices go up as rates go down, he said, so it’s smarter to lock in a price and refinance with a lower rate down the road.
Megan Banta is The Salt Lake Tribune’s data enterprise reporter, a philanthropically supported position. The Tribune retains control over all editorial decisions.