The U.S. housing market is in a state of paralysis. Mortgage rates refuse to budge from their stubbornly high levels, home prices are painfully elevated, and buyers and sellers alike are trapped in a cycle of hesitation.
What’s really going on behind the scenes? And what will it take to unfreeze the market?
The Fed’s Dilemma
In their latest quarterly economic projections, most Fed officials are penciling in one or two rate cuts this year, versus December’s forecast of two. But before any easing begins, the central bank is expected to keep rates unchanged at its upcoming meeting this week.
Complicating matters is a brewing storm on the trade front. The prospect of new tariffs threatens to deliver a double punch: pushing up prices while dragging down economic growth. That leaves the Fed in an awkward bind. If inflation flares up, the textbook response would be tighter policy. But if the economy stumbles, cutting rates becomes the obvious move. As Jay Bryson, chief economist at Wells Fargo, puts it, “It’s a question of which risk you’re more willing to tolerate.”
The Fed could slash rates for two very different reasons: a cooling economy or cooling inflation. The former would be an admission of weakness; the latter a victory lap. Right now, the latter scenario looks wobbly. The likelihood of sweeping tariff hikes has risen ominously since the Fed’s last meeting just seven weeks ago, casting fresh doubt over the case for “good news” rate cuts.
Worse, a full-blown trade war could force its hand in ways that are hard to predict. Trim rates and inflation could roar back to life. Stand firm and the economy could falter. Each path is fraught with risk, but inaction might be the riskiest of all.
This is not unfamiliar territory. In 2019 with trade tensions escalating under President Trump, the Fed preemptively cut rates. Back then, inflation was tame, allowing policymakers to act with little fear of stoking further price pressures. Today inflation has been running above the 2% target for four years, making any misstep riskier.
A Market on Ice
Against this uncertain backdrop, the housing market is locked in a standoff. The 30-year fixed mortgage rate sits at 6.65%, more than double the pandemic-era lows that fueled a housing boom. The fallout has been hard-hitting: existing-home sales in 2024 plunged to their lowest levels since 1995, to 4.06 million transactions, down sharply from 6.12 million in 2021.
High borrowing costs have made homeownership prohibitively expensive for many Americans. Monthly mortgage payments have soared while property taxes and insurance costs have only added to the strain. Yet prices have refused to correct meaningfully. The median sale price in February was $425,061, up 3.1% year on year, according to Redfin.
One reason for the market’s stubborn stagnation is the so-called “lock-in effect.” Homeowners who secured ultra-low mortgage rates in 2020 and 2021 are reticent to sell, unwilling to swap a sub-3% loan for one more than double that rate. As a result, inventory is scarce, propping up prices and leaving buyers with few options.
This creates a vicious cycle: high rates keep sellers on the sidelines, which limits supply, which sustains high prices, which in turn discourages buyers. Until mortgage rates decline meaningfully, this feedback loop is unlikely to break.
With the resale market stuck in gridlock, homebuilders have attempted to fill the void. Yet they, too, are facing headwinds. Rising construction costs and a smaller pool of eligible buyers have constrained activity. Some builders have turned to mortgage subsidies to entice buyers, but such incentives only paper over the broader affordability crisis.
Although new home construction may provide a partial solution, it cannot single-handedly restore balance to the market. As long as homeowners remain locked in, relief will be slow to arrive.
The Path Ahead
What comes next? The answer depends largely on the Fed. A rate cut could provide relief but policymakers are wary of acting too soon. Inflation is still running above target, and with trade tensions escalating, the Fed may prefer to stand pat for now. Even so, spring may bring some seasonal relief as more listings trickle onto the market.
Some analysts like Priscilla Thiagamoorthy of BMO Capital Markets believe the market will eventually adjust to higher rates, provoking a slow rebound. Others like Rick Palacios Jr. of John Burns Research & Consulting argue without a big slide in borrowing costs the housing market’s malaise will endure.
