The FOMC had elected to hold rates steady for the eight previous meetings, but recent labor market and inflation data led many economists to project a rate cut at Wednesday’s meeting. The unemployment rate has climbed above 4% in recent months, with job growth below 150,000 in each of the last three months. In August, the Consumer Price Index (CPI) measured 2.5% over the last 12 months, the lowest reading since February 2021.

“The Committee has gained greater confidence that inflation is moving sustainably toward 2%, and judges that the risks to achieving its employment and inflation goals are roughly uncertain,” the FOMC said in a statement released following the decision. “The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.”

In the weeks leading up to the Fed meeting, experts were split between projections of a 25-bp and 50-bp cut. NAHB chief economist Rob Dietz shared the projection the Fed would elect to cut rates by 25-bps in September with a further quarter-point rate cut in December. Zonda chief economist Ali Wolf says expectations of a 50-bp cut emerged in the past couple weeks, and—while a surprise—there was a greater probability of a half percentage point cut than a quarter percentage point cut.

“What the Federal Reserve is signifying to us is they no longer need to be slowing growth,” Wolf says. “They feel more confident that the rate of inflation has come down. They feel increasingly nervous that the labor market is cooling more dramatically and more quickly than they had originally thought. This 50-bp cut is signifying [the Fed is] going to do what it needs to do to prevent the economy from falling into a recession, within their ability.”

The FOMC indicated through its dot plot the equivalent of 50 more basis points cut by the end of the year with another full percentage point in cuts by the end of 2025 and a half-point in 2026.

National Housing Conference president and CEO David Dworkin says the rate cut will have “far-reaching implications” for the housing market, including potentially alleviating affordability concerns and stimulating inventory growth.

“First-time home buyers stand to benefit significantly from the rate reduction,” Dworkin says. “For every 1 percentage point decrease in mortgage rates, buyers of a median-priced home ($412,000 with 5% down) could save approximately $250 per month on their mortgage payments.”

While mortgage rates have fallen—the 30-year fixed rate mortgage was down nearly 1% on a year-over-year basis, according to the latest Freddie Mac Primary Mortgage Market Survey—Wolf says builders should expect to see rates come down further in the coming months.

“Traditionally, we see that mortgage interest rates go down ahead of the Federal Reserve cut, and history tells us that following the start of cuts you see another notable drop in interest rates,” Wolf says. “What I think builders have a unique advantage with today is that they can still offer mortgage rate buydowns. Builders should be playing up the idea—especially if they have buydowns—of ‘why wait’ [to potential buyers]. If you can get the lower interest rates today, buy now before more consumers come off the sidelines.”

Moody’s senior economist Lu Chen says, as the Fed continues to cut rates, the 30-year fixed rate mortgage rate will slide and “anchor around 6% in the near- to mid-term,” which will help single-family housing inventory “move out of its trough.”

Mike Fratantoni, senior vice president and chief economist of the Mortgage Bankers Association (MBA), says if mortgage rates remain near 6%, they will “support a stronger than typical fall housing market and suggest that next spring could see a real rebound in activity.”

As mortgage interest rates tick down in response to the Fed rate cuts, the impact of the lock-in effect could be less pronounced, Dworkin says. With lower rates, many homeowners will be more comfortable selling their homes, boosting housing supply and possibly putting downward pressure on home prices. Additionally, more resale inventory could contribute to an increase in move-up housing demand for builders, Wolf says.

“We’re monitoring an uptick of demand in the move-up market as interest rates go down, and [that] encourages a little bit more movement from people that own their home and feel the math is a little easier to trade up their property,” Wolf says.

Dworkin says an additional knock-on effect of lower mortgage rates is lower inflation, as shelter costs remain the main contributor in recent inflation reports.

Moody’s economist Nick Villa says the federal funds rate is likely still in a “restrictive territory with additional cuts needed to help restore the housing market to a more balanced equilibrium.” Higher rates have hindered new permits and starts but have also been a positive for apartment demand as rent growth has slowed.

Chen says lower interest rates coupled with lower inflation should ease financial burdens for consumers, especially for those that rely on credit card debt. However, Chen notes that in the rental market as demand continues to absorb excess supply, rent will grow over the course of the rate cutting period for the Fed.

“Resumed rent growth and lower cost of capital will reengage developers on the sideline, unlocking opportunities for more rental development, which is critical in the face of near 2 million units of housing deficit and robust rental demand from Gen Zers heading into prime age for renting and high volume of immigration in the past two years,” Chen says.

A period of rate cuts will also have a positive impact on lending conditions for developers and builders. Ahead of the September Fed meeting, Dietz shared with BUILDER that the more positive lending conditions could have an immediate short-term impact on housing supply.

Moving forward, Wolf says the home building industry should remain focused on the labor market.

“One thing builders should be watching is that while there is some enthusiasm around interest rates coming down, we do want to keep a close eye on the labor market to see if it deteriorates more,” Wolf says. “That’s important for housing demand because usually employment is a big driver of housing activity.”

Moving forward, Dietz says builders should track fiscal policy in addition to the pattern of Fed rate cuts over the next year.

“Whether it is new spending programs or tax policies, anything that can increase the federal debt represents an interest rate risk for the residential construction industry,” Dietz says. “We will be going from watching the Fed and hoping the Fed cuts rates to benefit the industry to looking at the size of debt and its impact on mortgage interest rates.”