Fed Cuts Rates for Third Time in 2025: Why Housing Headwinds Persist

It was a pivot point many in the industry had marked on their calendars, yet the outcome feels decidedly mixed.

On Wednesday, December 10, the Federal Open Market Committee (FOMC) announced its third interest rate cut of 2025, lowering the federal funds rate by another 25 basis points. Speaking to reporters afterward, Federal Reserve Chair Jerome Powell struck a cautious tone that tempered the immediate enthusiasm of real estate professionals. While acknowledging progress on inflation, Powell explicitly stated that the "housing market faces significant challenges" that monetary policy alone cannot fix.

This statement has sparked a flurry of questions from our readers. If rates are falling, why is the housing market still feeling stuck? Why did the Chair go out of his way to highlight these headwinds?

To help you navigate these complex dynamics, we’ve broken down the key components of Powell’s address and what they mean for the market in 2026.

One of the primary questions we received was why inventory hasn't flooded back onto the market despite three consecutive rate cuts this year. Chair Powell addressed this indirectly by noting that the "effective" mortgage rate for millions of Americans remains historically low.

The reality is a phenomenon economists call the "lock-in" effect. The majority of current homeowners are sitting on mortgage rates below 4%—and many below 3%—from the pandemic era. Even as the 30-year fixed rate trends downward following the Fed’s cuts, it has likely settled in the high-5% or low-6% range. The mathematical gap between a 3% rate and a 6% rate is still a massive financial disincentive for homeowners to sell.

Moving implies trading a cheap payment for a more expensive one, often for a similarly priced home. This friction keeps resale inventory artificially low. While the rate cuts help buyers on the margin, they haven't yet reached the "tipping point" required to convince existing owners to list their homes in mass quantities. Until rates drop significantly further—which the Fed has not promised—this inventory constraint will likely persist.

Source: Freddie Mac provides historical data and analysis on how mortgage rate differentials impact homeowner mobility and inventory levels. Freddie Mac Research

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Chair Powell’s comments highlighted a critical distinction: the difference between cyclical issues (like mortgage rates) and structural issues (like land and labor shortages).

While lower rates eventually help builders by reducing the cost of construction loans, the supply pipeline takes years to turn around. The housing market is currently suffering from a decade of underbuilding following the 2008 financial crisis. Powell noted that while financing conditions are easing, the physical constraints of zoning laws, skilled labor shortages, and high material costs remain.

Simply put, we cannot "rate cut" our way into more finished lots. Builders are currently cautious; they are ramping up slowly, wary of overextending as they did in previous cycles. This means that even if demand spikes due to lower rates, the supply of new homes will lag behind, keeping upward pressure on prices. The Fed can make money cheaper, but it cannot print more carpenters or lumber.

Source: The National Association of Home Builders (NAHB) tracks builder sentiment and the structural headwinds facing the construction industry, including regulatory costs and labor availability. NAHB Housing Economics

Perhaps the most sobering part of the Chair's address was the acknowledgment of the affordability crisis. Lower rates usually improve affordability, but in this unique cycle, they serve a double-edged sword function.

As rates dip, demand that has been sitting on the sidelines—millennials reaching peak buying age and Gen Z entering the market—rushes back in. Because inventory remains constrained (see the "Lock-In" effect above), this renewed demand pushes home prices higher, negating some of the monthly payment relief provided by the lower rate.

Powell’s warning suggests that the Fed is aware that returning to a "healthy" housing market is not just about the cost of borrowing, but about the ratio of home prices to income. With wage growth normalizing and home prices remaining near all-time highs, the "qualifying hurdle" for the average first-time buyer remains incredibly steep. The Fed’s tools are blunt; they can influence demand, but they cannot directly lower the purchase price of assets.

Source: The National Association of Realtors (NAR) regularly publishes the Housing Affordability Index, illustrating the disconnect between median incomes and median home prices. NAR Housing Affordability Index

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So, where does this leave us?

The third rate cut of 2025 is a positive signal that the era of aggressive hiking is truly over. We are in a normalization phase. However, real estate professionals should advise clients that a return to the frenzied, easy-money days of 2020-2021 is not on the horizon.

The "significant challenges" Powell referenced are likely to result in a market defined by:

The takeaway is one of managed expectations. The Fed is doing its part to grease the gears, but the engine of the housing market requires more than just oil—it requires new parts (inventory) and a tune-up (affordability) that will take time to engineer.

Are you navigating these market shifts?

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