Jerome Powell and the Fed have by accident stalled the housing market

Consumers are hanging on to properties they purchased a couple of years ago at lower mortgage rates instead of purchasing a new pad at higher rates, a new report has revealed.

Global real estate consultants Knight Frank wrote in its Q4 2024 U.S. market report, published Thursday, that rate volatility paired with economic uncertainty has stalled market movement.

Of course, members of the FOMC could argue that—even if it was their prerogative to insulate certain markets—they only set short-term rates, while mortgages follow the long-term.

However, the latter tends to follow the former, meaning that before the pandemic, house buyers enjoyed an extended period of incredibly low mortgage rates.

Since early 2022—when the Fed first began hiking rates to wrestle rampant inflation back under control—mortgage rates have spiked in turn and now sit at around 6%, while in early 2021, they went as low as 2.6%.

The problem is squeezing buyers across the scale, but for those owing a hefty sum to the bank, a change in mortgage rates could be worth thousands of dollars a month.

Knight Frank writes that the unwinding of the yen carry trade, given base rate moves in the U.S. and Japan, sparked fears among buyers: “Investors were questioning whether the Federal Reserve had underestimated the fragility of the global economy and the risk of a domestic recession.”

Economists’ reactions and advice varied widely. Some called for emergency rate cuts, while others stuck with a 25 basis point (bps) reduction.

“This shift is the key to unlocking the housing market across the U.S.,” Knight Frank continued. “Right now, homeowners remain reluctant to part with mortgages agreed during an era of ultralow rates.

“National market data confirms that turnover in the first eight months of the year hit the lowest level in at least 30 years.”

The trend is particularly pronounced on the more costly end of the scale, the report continues: “Despite a higher prevalence of cash buyers, elevated borrowing costs have weighed on activity in luxury markets, too.

“Prime buyers tend to have wealth tied up in other asset classes, many of which have been hurt by higher rates. That adds uncertainty, which has been compounded by the November election.”

Citing data from real estate consultants Miller Samuel, the report adds that 29 properties sold for at least $50 million in 2023, which is down 41% from 2021.

“You look at that [Fed repricing] and go, ‘Wow, housing should just explode,’ but you have to remember that mortgage rates are still double what they were before the pandemic,” wrote Jonathan Miller, CEO of Miller Samuel, in the report.

This context is important for explaining why the property sector can’t expect a “frenzied boom” as rates begin to come down, added Miller.

Despite the Fed’s unexpected 50 bps cut in September, the base rate is still effectively nearly five times as high as it was in 2021.

Stuck across the board

While the problem is impacting those at the lofty luxury end of the property sector, homeowners across the spectrum are also feeling backed into a corner over interest rates.

Investment and wealth advisors Edelman Financial Engines recently released its Everyday Wealth in America report for 2024, which found more than one in three homeowners feels “stuck” in their current home owing to rates.

This figure rises for homeowners under 50, with 49% of the demographic saying they cannot move up the property ladder because of mortgage offers.

More widely, the report found that nearly three-quarters of respondents (72%) were worried about rates across the board, with four out of 10 people saying they’d be willing to move to another state if it meant saving money.