Housing Gridlock

Answer: Yes, interest rates are expected to be cut in 2026, but it will likely be a gradual process. At the moment, the Federal Reserve Open Market Committee (FOMC) is in a “pause and assess” mode with two rate cuts anticipated in 2026.

Although the Fed doesn’t set mortgage rates, they’re closely tied to the 10-year U.S. Treasury yield that is influenced by the Fed’s interest rates. When the Fed lowers rates, banks can borrow money at a lower cost, typically causing mortgage rates to shift downward, but they don’t move on a one-for-one trajectory with the Fed’s moves.

Affordability?

Even if rates fall, housing affordability may not improve. Millions of homeowners hold super-low mortgage rates in the 2.5% - 4% range from mortgages secured between 2020-2021. They’re hesitant to sell, move, and finance at higher rates. People who are downsizing and financing a purchase don’t want to have higher payments on a smaller home. This means markets are somewhat frozen. Also, investors with low-rate mortgages aren’t selling their rental units, causing even fewer listings with limited supply keeping prices higher. Homebuyers are navigating a market where interest rates, affordability, and low inventory collide.

The housing market may feel stuck for young families, seniors, and even renters. Even if the Fed cuts rates, it doesn’t necessarily mean that bank mortgage rates will come down immediately. When banks price loans, lenders consider their costs over a 15–30-year period, including inflation, and set rates accordingly.

Supply

The rate concept feeds directly into the second challenge of finding an affordable home; there’s a limited supply. The U.S. needs to build roughly 1.7 to 2 million homes each year to match new household formation. We build about 1.3 to 1.5 million homes each year leaving a gap of around 4 to 5 million homes annually. The Congressional Budget Office (CBO) predicts 1.6 million new home starts per year in the second half of this decade, still not enough to close the gap. Builders, buyers, and sellers all face gridlock which keeps prices higher.

Mobility Matters

Geography matters too. When I was growing up, my parents moved wherever the best job opportunities existed for my dad’s career. Mobility mattered. With today’s work-from-home (WFH) environment, people tend to work and live where they’re most comfortable. This, along with retirees moving to Florida, intensifies the gridlock.

Insurance costs influence housing prices also. Higher premiums in states like Florida reduce affordability for buyers. Homeowners may hesitate to sell and walk away from affordable policies, concerned that they won’t be able to obtain insurance on a new home, further adding to gridlock.

Dominos

Housing transactions tend to take place in a domino manner; one leading to the next. Sellers may not be comfortable listing or selling until their next step is obtainable or secure. It’s circular in nature; low inventory leads to fewer listings, causing lower inventory and less mobility. Rates are obviously part of this equation as well, but not the only factor.

Interest rate cuts aren’t guaranteed, but the Fed’s commitment to fight inflation and keep the job market stable could help the housing market in the coming year. If mortgage rates do fall to 6% or below, we could see renewed mortgage demand, helping to ease the friction and gridlock that’s hampered buyers, sellers, and builders in recent years.

Cutting interest rates may seem like the obvious solution to the housing gridlock, but doing so too quickly could actually make things worse. By rapidly increasing demand due to lower rates and affordability without allowing inventory and supply to catch up, home prices could actually increase and skyrocket, even with lower, more affordable interest rates.

Slow and steady wins the race. Cutting rates gradually over time allows the housing market to adapt and provide lower monthly payments. We don’t want to see demand dramatically increase before supply has a chance to grow. The natural cycle of moving up or down the housing ladder has become a chain reaction where one group’s inability to move impacts the others. From retirees unable to downsize to first-time buyers priced out of the market for starter homes, the market is stalled at every level.

It’s no secret that President Trump is preparing to announce Fed Chairman Powell’s replacement. A new Chairman is expected to take over by the June 2026 meeting. Some rate action may be politically motivated, although an independent Fed should not be influenced by politics. Another complication is that Powell is under Department of Justice investigation. Unfortunately, the answer to your question is more complicated than a simple “yes” or “no” but is rather “wait and see.” Stay focused and plan accordingly.