The U.S. housing market is in a slump, and the Federal Reserve has taken notice.

Notes from the Fed meeting in July highlight discussion between committee members on slow economic growth in the first half of the year, due in part to a decline in residential investment. Members reflected on weakening housing demand, more homes for sale and falling house prices.

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Staff economists at the Fed also reported that housing valuations have edged down but remain elevated.

Participants warned that a “more substantial deterioration in the housing market” is a downside risk to jobs.

According to the National Association of Realtors [1], existing-home sales ticked up just 0.8% year over year in July, but inventory (15.4% increase) and months’ worth of supply (4.0 to 4.6) rose significantly from a year earlier — signals that the market is slackening rather than roaring back.

The rate of new-home sales, seasonally adjusted, fell year over year in July, per the Census Bureau. The months’ supply rate also increased to 9.2 months, compared to 7.9 months last year.

For the homebuilding industry, the signs point toward caution, which could continue to exacerbate the U.S. undersupply problem as the economics of building new houses and the lack of demand from buyers work together in a vicious cycle to disincentivize new construction.

High mortgage rates can have an impact on housing affordability, but lower borrowing costs may not be a silver bullet to revive the housing market. Many owners of existing homes are “locked in” to cheap pandemic-era mortgages, which has contributed to housing supply problems by making it difficult to move at all. Fed research attributes almost half of the U.S. consumers’ drop in mobility from 2021 to 2022 to the mortgage rate lock-in effect.

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First-time buyers may feel the squeeze the most. A recent Fed board speech by Governor Adriana D. Kugler highlighted that higher mortgage rates disproportionately reduce purchases by lower-income households, which pushes homeownership dreams further out.

But even if the Fed made a sizable rate cut, it may not translate into lower mortgage costs. The rate on the 10-year U.S. Treasury yield is more closely tied to fixed-rate mortgages rates, and has remained obstinately high in recent years.

If you’re in the market for a house, you may feel stuck with a low-interest pandemic era loan, or you may feel houses are just too pricey, and you’re waiting for mortgage rates to fall before jumping into the market. But some experts say if you have the means, you should not wait for mortgage prices to fall. It would take a drastic drop in housing prices to make homes feel affordable in many major U.S. cities, and the future of mortgage rates, which have been consistently elevated in recent times, remains uncertain.

If you have some flexibility, you may try to widen your search to neighborhoods with rising inventory. Especially in cities in the Midwest and South, Zillow [2] estimates houses can be affordable even with a 6.7% interest rate. It’s always best practice to have all your documents ready to go, and if possible try to get pre-approved for a mortgage.

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[1]. National Association of Realtors. “NAR Existing-Home Sales Report Shows 2.0% Increase in July”

[2]. Zillow. “Rate, Price Drops Won’t Substantially Improve Affordability”

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