The Federal Reserve is expected to cut interest rates in September for the first time in over four years, which could provide a significant boost to the U.S. housing market. However, recent actions by Canada's central bank highlight that the effects of rate cuts are not always straightforward.
Canada's Experience with Rate Cuts
In early June, the Bank of Canada made its first rate cut since March 2020, reducing the target rate by 25 basis points to 4.75%. Contrary to expectations, homebuyers did not rush to take advantage of the lower rates. Instead, home sales fell. In the Greater Toronto Area, home sales dropped 16.4% year-over-year in June, according to the Toronto Regional Real Estate Board (TRREB). TRREB President Jennifer Pearce noted that one rate cut was insufficient, suggesting that cumulative cuts of 100 basis points might be necessary to significantly boost home sales.
This trend was mirrored in other major Canadian cities. Calgary saw a 12.8% drop in home sales, while Vancouver experienced a 19.1% decline.
Factors Affecting the Canadian Housing Market
Phil Soper, president and CEO of Royal LePage, pointed out that the 25 basis point cut did little to improve housing affordability. The aggregate price of a home in Canada rose 1.9% year-over-year in the second quarter of 2024 to around $600,000 USD, according to the Royal LePage House Price Survey.
Additionally, Canada's higher unemployment rate, which stood at 6.4% in June compared to 4.1% in the U.S., likely influenced the central bank's decision to cut rates sooner. However, the rate cut alone was not enough to offset the effects of rising unemployment.
What This Means for the U.S. Housing Market
The Federal Reserve is not expected to cut rates at its next meeting in late July, but a September cut appears likely. Homebuyer enthusiasm will depend on more than just the Fed's actions this fall; consumers will also be closely watching the signals sent in the coming months. Chen Zhao, who leads Redfin's economic team, emphasized the importance of the Fed's communication. Questions about whether the September cut is the first of many and how many cuts will follow in 2025 will be critical.
Mark Fleming, chief economist at First American, suggested that while fear of missing out on future lower rates might prevent a rush into the market, lifestyle decisions driving the desire to become a homeowner will likely outweigh any hesitation.
Psychological Factors and Market Dynamics
Psychological factors, such as the upcoming November election, may also influence buyer behavior. Some buyers might delay significant financial decisions until after the election to avoid uncertainty.
Even if buyers return to the market, the motivation of sellers remains uncertain. Zhao believes buyers will re-enter the market if rate cuts reduce borrowing costs. However, whether sellers will also jump in is unclear, especially given the "lock-in effect" for homeowners with ultra-low mortgage rates from previous years.
Zhao anticipates a modest increase in sales, possibly 5-10% over the coming months, following the start of rate cuts. However, she cautions that a 25 basis point cut might not be enough to significantly change the market dynamics. Many homes traded hands during the pandemic, and it's uncertain whether there are enough people who need to move again to create a significant shift in inventory.
In summary, while potential interest rate cuts by the Federal Reserve in September could boost the U.S. housing market, the experience of Canada's recent rate cut suggests that the effects may not be immediate or straightforward. Market participants will be closely watching the Fed's actions and communications in the coming months to gauge the future direction of the housing market.
