I recently spoke with a couple who want to sell their home. Their Realtor told them the market was a little soft but added that interest rates were likely to come down this year.
The suggestion was that falling rates would boost home prices. That’s a common assumption, but it left me wondering whether it is always true.
There are two key questions worth asking. First, do mortgage rates always go down when the Federal Reserve (“Fed”) cuts interest rates? And second, even if mortgage rates decline, should we expect home values to rise as a result?
To explore this, I spoke with Eric Steuernagle, owner of Fairground Real Estate in Great Barrington and a housing expert. I also looked back at decades of data on interest rates and home prices.
Fed funds and mortgage rates
The Fed directly controls a short-term interest rate known as the “federal funds rate.” This is the rate banks charge one another for overnight loans. It plays an important role in the economy, but it’s not the same as the interest you’d pay on a 30-year mortgage. Mortgage rates are tied more closely to long-term rates, which are influenced by inflation, investor expectations, housing demand and even global events.
Still, historical data show that short-term rates (like the federal funds rate) and long-term rates (like 30-year mortgage rates) generally move in the same direction. Since the late 1980s, the average spread between the Fed’s target rate and the 30-year mortgage rate has been about 3 percentage points (see chart). So, if the Fed’s rate lands near 3.5 percent, mortgage rates might settle at around 6.5 percent — roughly where they are today.
This is one reason Steuernagle is skeptical that housing will become dramatically more affordable. He says that home prices would likely increase “if you think interest rates are going back to 2.75 percent, but that may have been once in a lifetime.”
The Fed recently cut the fed funds rate by 0.25 percentage points and is expected to make two more cuts this year, totaling a 0.75-point reduction. The goal is to stimulate the economy as signs of labor market weakness emerge. So, while Fed cuts may bring mortgage rates down slightly, there’s no guarantee they will fall by a huge amount.
The historical data suggest that longer-term interest rates, including mortgage rates, may decline slightly if the Fed lowers the overnight lending rate. But to Steuernagle’s point, mortgage rates between 5 and 6 percent are much less enticing for buyers than the 3 percent rates we saw a few years ago.
Mortgage rates and home values
Even if mortgage rates do decline, the bigger question is what that means for home prices. In theory, lower mortgage rates make monthly payments more affordable for buyers, which should support higher home values. But history shows the connection is far from consistent.
Consider four major rate-cutting cycles in recent decades:
• Early 1990s (Gulf War recession): Mortgage rates fell from about 10 percent to 7 percent between 1990 and 1993. Yet home values barely budged, rising just 2 percent over four years.
• Early 2000s (dot-com bust): Rates fell from around 8 percent to 6 percent between 1999 and 2003. This time, home prices surged, rising by about 40 percent nationally.
• 2007–2008 (global financial crisis): Rates declined from about 6 percent to 5 percent, but home prices cratered, falling 17 percent as the housing market collapsed.
• 2019–2020 (COVID-19 pandemic): Mortgage rates dropped from roughly 4.5 percent to a record-low 2.7 percent. Home prices spiked 14 percent and kept climbing afterward.
The takeaway from these past rate-cutting episodes is that economic factors like unemployment, stock market performance, and financial crises can overwhelm the impact of falling rates. Lower borrowing costs are helpful, but they don’t guarantee rising prices.
Steuernagle notes that current rates have been stifling sales. Many homeowners refinanced when rates were near 3 percent, and they are now understandably reluctant to give up those mortgages. Meanwhile, buyers may continue to face affordability challenges even if rates fall to 5 or 6 percent. A move down into the 5 percent range could provide some relief for buyers, but it’s unlikely to spark the kind of frenzy we saw during the pandemic.
It’s also important to remember that housing markets are highly local. Taxes, job opportunities, school quality, and community factors all shape affordability and demand in ways that national interest rates can’t fully explain. In fact, Steuernagle says, taxes and other local factors can be more relevant in assessing affordability.
Bottom line on home values
It is a reasonable expectation, although certainly not guaranteed, that mortgage rates are likely to fall in response to Fed rate cuts.
Whether lower mortgage rates increase home values is another question altogether. Home prices are driven by many economic factors beyond interest rates, including unemployment and the value of the stock market.
For buyers and sellers today, the takeaway is to keep expectations realistic. Mortgage rates may ease in the coming months, but that doesn’t mean home prices will automatically climb. If anything, broader economic trends and local market dynamics will play a bigger role than Fed policy alone.