N※N

Show House and Home Publications

Mortgage Rates Fall: Could This Thaw the Frozen Housing Market?

Mortgage Rates Are Dropping—Could This Finally Thaw the Frozen U.S. Housing Market? Insights from Oxford Economics

In a landscape where the U.S. housing market has been described as "frozen" for years, recent drops in mortgage rates are sparking cautious optimism among economists, homebuyers, and sellers alike. This development comes amid broader economic shifts, including cooling inflation and signals from the Federal Reserve about potential interest rate cuts. To delve deeper into what this means for the beleaguered real estate sector, Fortune sat down with Nancy Vanden Houten, a senior economist at Oxford Economics, for an exclusive interview. Vanden Houten, with her extensive background in macroeconomic forecasting, provides a nuanced view of how declining mortgage rates could gradually unlock inventory, boost affordability, and stimulate activity in a market that's been stifled by high borrowing costs and homeowner reluctance.

The conversation begins with the current state of the housing market, often characterized as frozen due to the "lock-in effect." This phenomenon refers to homeowners who secured ultra-low mortgage rates during the pandemic era—many below 3%—and are now hesitant to sell and face rates that, even after recent declines, hover around 6-7%. As Vanden Houten explains, this has led to a severe shortage of existing homes on the market, pushing prices skyward and sidelining first-time buyers. "The market has been in a deep freeze because sellers are essentially trapped by their low rates," she notes. "Even as rates start to come down, it will take time for that psychology to shift."

Recent data underscores this freeze: Home sales have plummeted to multi-decade lows, with existing-home sales dropping by over 20% compared to pre-pandemic levels. New construction has picked up some slack, but it's not enough to meet demand, especially in high-growth areas like the Sun Belt states. Vanden Houten points out that the average 30-year fixed mortgage rate, which peaked above 7% earlier this year, has now dipped below 6.5% following the Fed's hints at easing monetary policy. This drop, she argues, is a critical first step. "We're seeing the initial signs of thawing," she says. "Lower rates reduce the monthly payment burden, making homes more accessible to a broader pool of buyers."

But Vanden Houten tempers expectations, emphasizing that a full thaw won't happen overnight. She predicts that mortgage rates could fall further to around 5.5-6% by the end of 2025, assuming the Fed implements a series of rate cuts in response to softening labor market data and controlled inflation. This projection aligns with Oxford Economics' baseline forecast, which anticipates a gradual economic slowdown without a recession. "If we avoid a downturn, rates could stabilize at levels that encourage more listings," she elaborates. However, she warns of risks: If inflation reaccelerates or geopolitical tensions escalate, rates might not decline as hoped, prolonging the freeze.

One key aspect of the interview focuses on inventory dynamics. Vanden Houten highlights how the lock-in effect has suppressed supply, with homeowners staying put to avoid higher rates on new purchases. As rates drop, some of these "golden handcuff" holders might finally list their properties, especially if life events like job relocations or family changes necessitate a move. "We're already seeing anecdotal evidence of increased listings in markets like Florida and Texas," she observes. This could lead to a modest uptick in supply, potentially cooling home price growth from the double-digit increases seen in recent years to a more sustainable 3-5% annually.

Affordability remains a central theme. Even with lower rates, home prices are at all-time highs, and wages haven't kept pace. Vanden Houten stresses the need for multifaceted solutions beyond just rate reductions. "Policy interventions, such as incentives for new builds or reforms to zoning laws, are essential to address the underlying supply shortage," she says. She also touches on the role of demographics: Millennials and Gen Z buyers, burdened by student debt and high rents, are particularly sensitive to rate changes. A drop to sub-6% rates could bring thousands more into the market, but without sufficient inventory, bidding wars might persist.

Looking ahead, Vanden Houten outlines several scenarios for 2025 and beyond. In her optimistic view, sustained rate declines combined with steady economic growth could see home sales rebound by 10-15% next year, thawing the market and fostering a more balanced environment. Conversely, if rates stall or rise due to unexpected economic shocks, the freeze could deepen, leading to further price volatility and reduced mobility. She also discusses the broader economic implications: A healthier housing market supports consumer spending, construction jobs, and overall GDP growth. "Housing is a bellwether for the economy," she asserts. "Getting it moving again would signal broader recovery."

The interview also explores regional variations. In high-demand coastal cities like San Francisco and New York, where inventory is chronically low, rate drops might have a amplified effect, drawing in buyers who've been waiting on the sidelines. In contrast, in more affordable Midwest markets, the impact could be muted unless job growth accelerates. Vanden Houten cites Oxford Economics' models, which incorporate factors like migration patterns and remote work trends, to predict that Sun Belt regions will see the fastest thaw due to population inflows.

Challenges persist, including the lingering effects of the pandemic-induced buying frenzy, which depleted affordable housing stock. Vanden Houten advocates for increased investment in workforce housing and public-private partnerships to build more units. She also addresses the rental market, noting that as homeownership becomes more attainable with lower rates, rental vacancies might rise, potentially easing rent pressures that have soared in recent years.

In wrapping up, Vanden Houten remains guardedly positive. "The drop in mortgage rates is a welcome development, but it's just one piece of the puzzle," she concludes. "For the housing market to truly unfreeze, we need sustained economic stability, policy support, and a shift in seller sentiment. If those align, 2025 could mark the beginning of a more vibrant era for U.S. real estate." Her insights provide a roadmap for stakeholders, from potential buyers monitoring rate trends to policymakers crafting housing strategies. As the Fed's next moves unfold, all eyes will be on whether this rate relief can indeed melt away the market's icy grip, ushering in a period of renewed activity and opportunity.

This analysis, drawn from Vanden Houten's expertise, underscores the interconnectedness of monetary policy, consumer behavior, and housing supply. While uncertainties loom, the trajectory suggests that patience and proactive measures could transform the frozen landscape into one of fluidity and growth. (Word count: 928)

Read the Full Fortune Article at:
[ https://fortune.com/2025/08/13/mortgage-rate-drop-frozen-housing-market-oxford-economics-interview/ ]