If you are waiting to buy an affordable home when rates drop, you're out of luck

Mortgage rates might be on their way down, but home shortages are likely to keep prices high. Getty Images

• Federal Reserve rate cuts could make mortgages more accessible in 2024. 
• But, despite lowered rates, steep home prices and cost of living may still hinder homeownership.
• High demand and an affordable housing shortage in many cities could keep homes expensive. 

Interest rates could drop by summer, according to Federal Reserve forecasts, but buyers shouldn’t expect homes to become more affordable.

The Fed plans to cut interest rates several times in 2024, aiming to bring the federal funds rate down to 4.6% around May or June. Rates have sat between 5.25% to 5.5% since last July, and the strong labor market and cooling inflation are signaling national economic health.

The federal funds rate doesn’t directly impact consumers, but it will influence interest rates on products like credit cards, mortgages, home equity loans, and student loans over time.

For prospective homebuyers, the cuts could be a path toward relief from skyrocketing mortgage rates. Last year, the monthly cost of a typical American mortgage rose to 40% of a buyer’s household income, according to Capital Economics — the highest rate in nearly four decades. 30-year fixed mortgage rates are now sitting just above 6.6%, which translates to around $2,800 in average monthly payments nationwide.

Fed Chair Jerome Powell told “60 Minutes” in a February 1 interview that he understands the importance of mortgage and employment stability, especially for young people. Gen Zers and millennials are slowly becoming more optimistic about buying a home.

“I think people have been patient and have been through a pretty difficult time, and I think now we’re coming through that time and starting to feel a little bit better about things,” he said. “Mortgage rates have come down a bit in anticipation of lower rates.”

Lower mortgage rates won’t fix high home prices

Mortgage rates are determined by a few key factors: inflation levels, the cost of borrowing, perceived market risks, and the personal finances of a prospective buyer. All these factors can fluctuate.

Still, these rates are just a piece of a complex housing market.

The national median home sale price was $322,800 at the end of 2018, per the St. Louis Fed, and was $417,700 at the end of last year. Home prices rose significantly during the pandemic, and the market hasn’t fully settled.

Steep interest rates in recent years have made homeowners less likely to sell, contributing to a housing shortage in many cities. And, with a low housing supply, prices are likely to remain high.

Areas with construction of lower-cost housing options could see prices begin to fall at the local level, per Axios, but it’s unlikely to happen at the national level any time soon. The country is short about 3.2 million homes.

Many urban areas like New York, Chicago, and Seattle are experiencing a significant affordable housing crisis, with local governments exploring solutions to homelessness and looking to expand temporary and permanent housing options.

Barriers to homeownership are also coupled with a higher cost of living in many areas, with necessities like groceries, gas, and childcare becoming more expensive. San Francisco, San Jose, and Boston are among the most costly US cities to house and raise a family.