Rate Cuts Spark Refi Boom but Housing Supply Keeps Affordability Out of Reach

Yes, the Federal Open Market Committee cut its overnight fed funds rate last week, prompting banks to reduce their prime rates, and the effects were felt almost immediately: refinance applications, according to the Mortgage Bankers Association, jumped 58 percent in just one week, reaching levels reminiscent of the 2020 boom. That surge in volume may be reason for optimism among lenders and vendors alike, who are thrilled to see the pipeline filling up again. However, rising application counts don’t mean housing affordability is improving. As Robbie and I often remind our audiences, if mortgage rates drop to 1 percent, the most likely outcome is not broader affordability, it’s higher home prices, particularly for starter homes. Cheap borrowing costs fuel bidding wars and asset inflation, not housing accessibility.

Mortgage rates have indeed come down, posting their sharpest weekly drop in over a year, with many lenders now quoting 30-year fixed rates in the low 6s. This decline has reignited both refinance and purchase activity, pushing demand back to early 2022 levels. But while the demand side has picked up, the supply side remains structurally broken. The average effective interest rate on outstanding mortgages is still around 4 percent, and many borrowers remain “locked in” with sub-4 percent rates, making them highly reluctant to sell and trade up. Though some homeowners are refinancing to consolidate debt (like credit card balances), most remain in place, sitting on homes with low loan-to-value ratios and exceptional credit profiles. This dynamic limits turnover in the existing home market and pushes buyers toward new construction, if they can afford it.

This “lock-in” effect has become one of the most powerful forces in today’s housing ecosystem. Without move-up buyers, inventory stagnates and churn declines. The imbalance is so severe that newly built homes are now cheaper than existing homes by roughly $33,000, an inversion of the norm that speaks to how skewed the market has become. Four years ago, only about 16 percent of homes for sale were new builds; today, that number has doubled to over 30 percent, a record high. Builders have stepped in to fill the gap, but they haven’t been able to scale fast enough to offset the chronic underbuilding of the past decade. For many buyers, especially first-timers, new homes are no longer just a choice, they’re the only option.

It’s important to recognize that interest rate cuts alone won’t solve the housing market’s core problem. Lower rates bring in more buyers, not more homes. Without a significant increase in housing supply, or a major drop in rates toward the 4 percent range (something few truly want, given the economic implications), home prices are likely to keep climbing. Even modest cuts, while helpful, will simply stoke further demand without pulling additional inventory into the market. And with inflation showing signs of persistence, the Fed is likely to be cautious with additional easing, limiting how far rates can realistically fall. This creates a feedback loop: higher rates lock in sellers, limited supply drives up prices, and lower rates only intensify the imbalance.

Meanwhile, any hope that a housing correction will be driven by distress or forced sales appears misplaced. Homeowners today are far more financially secure than they were during the Great Financial Crisis. Delinquency rates are near historic lows, just one-sixth of what they were in 2008, and widespread foreclosure risk is minimal unless unemployment spikes above 6 percent. In short, there’s little structural pressure on homeowners to sell, and plenty of financial incentive to stay put. So here we are: strong demand, scarce supply, and little relief in sight. For now, all signs point toward continued price appreciation, not because the economy is booming, but because the fundamental mismatches in the housing market remain unresolved.