Federal Reserve officials are sounding the alarm on the U.S housing market, according to the minutes of the Federal Open Market Committee’s September meeting released Wednesday.
The central bank cut its benchmark interest rate by a quarter of a percentage point last month, marking the first cut since December 2024. Policymakers noted that activity in the housing sector remains sluggish and warned that conditions could worsen, potentially putting pressure on economic growth.
“Several participants noted continued weakness in the housing market, and a couple of participants mentioned the possibility of a more substantial deterioration in the housing market as a downside risk to economic activity,” the minutes said.
The minutes also revealed that despite a modest decline in the 30-year fixed rate on conforming residential mortgages, borrowing costs remain elevated.
According to October’s ICE Mortgage Monitor, mortgage rates briefly dipped to 6.215% just before the cut but rebounded by 12 basis points in the days that followed. This disconnect stems from the fact that the Fed doesn’t directly control longer-term bond yields, which are what most lenders use to set mortgage rates.
For many would-be buyers, higher rates and tighter lending standards mean fewer affordable options and more challenging hurdles to qualify for a loan.
Credit remains tight, especially for those with lower credit scores, and delinquency rates for Federal Housing Administration mortgages are still elevated, underscoring stress among vulnerable homeowners. By contrast, delinquency rates for other mortgage loan types stayed near historical lows, the minutes showed.
“It appears that it reinforces the market view that the Fed will continue to cut. Fed officials cited various downside risks in the economy, including the housing market, where lack of affordability is constraining sales,” said Carl Gomez, a senior economist at Homes.com.
“That suggests that the policy rate is still too high. Though the Fed does not control mortgage rates, this was an indication that they would generally like to see them lower," Gomez added.
Weakness in housing could have ripple effect
Several Fed officials warned that ongoing weakness in housing could spill over into broader economic activity, making them more attentive to these risks for future policy actions.
In September, a week after the Fed rate cut, Vice Chair Michelle Bowman raised concerns: “A third challenge for monetary policy would be a sharp housing market correction. Although supply factors have been weighing down on housing activity for a while, demand factors appear to have recently become the dominant force.”
“Elevated mortgage rates may be exerting a more persistent drag, as income growth expectations have declined while house prices remain high relative to rents. Given very low housing affordability, existing home sales have remained depressed despite higher inventories of homes for sale. I am concerned that declines in house prices could accelerate, posing downside risks to housing wealth and inflation in the years ahead," Bowman said.
New projections released after the meeting show officials expect two additional quarter-point cuts by the end of the year, according to their median estimate. Still, the minutes showed the deep division among the 19-person committee, as seven participants projected no additional cuts in 2025.
Some members saw merit in keeping rates unchanged at the September meeting.
Policymakers noted rising risks to the labor market, but recent data did not indicate a sharp deterioration. As officials weigh their next move, they emphasized the need to balance inflation and employment. This decision could have implications for the housing market, where affordability and demand could stay under pressure.
“Against this backdrop, participants stressed the importance of taking a balanced approach in promoting the committee’s employment and inflation goals,” the minutes said.
The upcoming meeting is scheduled for Oct. 28 to 29. The Fed held its meeting two weeks before the government shutdown, which caused a pause in key economic data.