The weak job market may initially temper homebuyer demand, but eventually, falling rates should help “revive sales activity.”
When the Federal Reserve meets this week, it will have to weigh two opposing economic forces — a weakening labor market and rising inflation — but it can take heart in knowing that one key component of inflation is cooling nicely.
Last week’s inflation report showed that shelter inflation rose 3.6% year-over-year — still higher than what the Fed would like, but the lowest level in nearly four years, according to the National Association of Home Builders.
The NAHB’s “Real” Rent Index — which compares inflation in rents to core inflation — indicates that cooling continues to be the trend. In August, the index showed that rent growth was flat during the first eight months of 2025, slower than the 0.1% increase for the same period in 2024.
What this means for short-term interest rates: The Fed, which is widely expected to cut short-term rates by 25 basis points on Wednesday, Sept. 17, will likely consider shelter inflation when evaluating inflation trends. A more aggressive 50-basis-point cut is also possible, and some market watchers predict the Fed will now make three cuts in 2025.
Analyst expectations appear to be priced into the lower mortgage rates seen over the past week. Mortgage News Daily pegged the 30-year fixed-rate mortgage at 6.25% on Sept. 15, down from 6.59% about a month ago.
“Given the housing market’s sensitivity to interest rates, [restarting rate cuts] could help ease the affordability crisis and support housing supply even as builders continue to face supply chain challenges,” said Fan-Yu Kuo, a senior economist at NAHB.
High rates the ‘biggest economic problem’? It’s unclear whether this recent drop in mortgage rates will be enough to get potential homebuyers off the sidelines, but mortgage purchase applications did jump last week.
One in three buyers now see high mortgage rates as the country’s biggest economic problem, and 75% believe today’s rates are unusually high — even though they’re below the 50-year average, according to Greg Schwartz, CEO of Tomo Mortgage.
“That disconnect between perception and reality is driving real stress in the market, and until confidence returns, demand will remain fragile,” Schwartz said in an email.
It may take time for demand to pick up: Historical research suggests that homebuyer demand will initially drop because of the weakening job market, said Ali Wolf, chief economist at Zonda, in a LinkedIn post. But if rates remain low, things could turn around.
“Falling interest rates eventually outweigh those headwinds, helping revive sales activity,” Wolf said, noting that housing usually turns the corner more quickly than the overall economy.