Fed's gradual rate cuts spark refinancing wave but housing market remains sluggish

The Federal Reserve’s slow rate cuts have led to more homeowners refinancing their mortgages, but the overall housing market is still weighed down by too many unsold homes and low confidence among builders.

Although lower rates have helped some homeowners, homebuyers and builders have seen less benefit.

Matthew Martin, senior US economist at Oxford Economics, said, “Our in-house business cycle indicator shows the economy has enough stability to weather the recent weakening in the labor market. The underlying strength of the economy will likely deter the Federal Reserve from adopting an aggressive approach to normalizing interest rates.”

Martin added that “the outlook for consumer spending is brightening,” with resilient spending through Q2 and the impact of tax cuts expected to be felt early next year.

He noted, “A subset of households will also benefit from lower monthly payments as they refinance their mortgages, freeing up cash.”

Refinancing activity has surged as mortgage rates dipped to 6.25%, with many homeowners seizing the opportunity to lower their monthly payments. Still, there’s limited room for a major refinancing boom, since only 19% of mortgage holders have rates above 6%, according to the Federal Housing Finance Agency.

“Our long-term forecast is for mortgage rates to settle at 6% in the long term, meaning the vast majority of homeowners will be unable to benefit from refinancing,” he said.

Fannie Mae’s Economic and Strategic Research Group predicted that 30-year mortgage rates will fall to 6.4% by the end of 2025 and drop further to 5.9% by late 2026.

Despite the rate cuts, housing construction has shown little sign of a rebound. “Any improvement is unlikely to translate into gains in single-family starts until builders clear some of their unsold single-family homes – the most since 2009,” Martin said.

He also highlighted ongoing affordability issues due to recent home price appreciation, predicting that housing starts are likely to remain sluggish for the rest of the year.

The gradual pace of rate cuts is expected to filter through the economy slowly. Martin explained, “It can take more than four quarters for a decrease in the real Fed funds rate to filter through to higher business equipment spending.”

He projected that the economy would receive a boost from fiscal policy, looser financial conditions, and reduced uncertainty heading into 2026. “The economy is at risk should the labor market deteriorate more than expected, but the underlying strength of the economy will ultimately mean a recession is avoided and a soft landing achieved,” Martin said.