Will a fall rate cut kick-start home sales?
The Fed is expected to cut rates in September, which may spur buyer activity — but after Canada’s central bank cut rates for the first time in June, sales fell.
Key points:
- In several of Canada’s biggest metro areas, home sales were down year-over-year following a rate cut, as buyers appeared to be holding out for further cuts.
- While the U.S. could see a similar trend, Canada’s weaker labor market may be contributing to slower sales.
- U.S. economists think buyers are likely to return if rates dip, but a small decline might not motivate homeowners with low rates to sell.
The Federal Reserve is expected to cut interest rates in September for the first time in more than four years — something that could give the U.S. housing market a boost. But when Canada's central bank made a similar move last month, the results were disappointing.
In early June, the Bank of Canada made its first cut since March 2020, knocking off 25 basis points to put the target rate at 4.75%. Homebuyers, however, did not rush to take advantage of the lower rates — instead, home sales fell.
In the greater Toronto area, home sales were down 16.4% year-over-year in June, according to the Toronto Regional Real Estate Board (TRREB), whose president suggested that one cut was simply not enough.
"The Bank of Canada's rate cut last month provided some initial relief for homeowners and homebuyers. However, the June sales result suggests that most homebuyers will require multiple rate cuts before they move off the sidelines," said TRREB President Jennifer Pearce, adding that cumulative rate cuts of 100 basis points are needed to boost home sales by a significant amount.
Toronto was not an outlier: In Calgary, home sales were down 12.8% in June, while Vancouver sales were down 19.1%, according to real estate associations in those areas.
Affordability, unemployment weighing on the market
The 25 basis point cut didn't do enough to improve the affordability picture, said Phil Soper, president and CEO of Royal LePage. The aggregate price of a home in Canada increased 1.9% year-over year in the second quarter of 2024 to around $600,000 U.S. dollars, according to the Royal LePage House Price Survey.
"Canada's housing market is struggling to find a consistent rhythm, as the last three months clearly demonstrated," Soper said.
One big difference between the U.S. and Canada real estate markets is the unemployment rate: In Canada, unemployment was 6.4% in June, while it was just 4.1% in the U.S.
Canada's higher levels of unemployment over the past year were likely a factor in the central bank's decision to cut rates sooner — but the rate cut alone may not have been enough to counteract the effects of rising unemployment.
Will the U.S. see a similar trend?
The Federal Reserve is not expected to cut rates at its next meeting in late July, but a September cut appears likely.
Homebuyer enthusiasm, however, may hinge on more than just the Fed's actions this fall — consumers will also be paying attention to the signals it sends in the coming months, said Chen Zhao, who leads Redfin's economic team.
"With the next two meetings, I think it's going to be a lot about what they say," Zhao said. "Is this the first [rate cut] of many? How many are we going to get in 2025?"
Those questions could lead some buyers to wait, said Mark Fleming, chief economist at First American, but "while fear of missing out on lower rates in the future may prevent a rush into the market," he said, "lifestyle decisions driving the desire to become a homeowner will overcome any FOMO."
But other psychological factors may come into play, Zhao said. With the November election ahead, some buyers may be hesitant to make big financial decisions until after the uncertainty of the election is behind them.
Even if buyers return, are sellers motivated?
Zhao believes buyers will come back into the market if rate cuts bring down borrowing costs. The question in her mind is whether sellers will also jump in, given the demographic tailwinds and the lock-in effect for homeowners with ultra-low mortgage rates.
"I think sales could pick up like 5-10% over the coming months after they start cutting," Zhao said, noting that the first rate cut would probably be 25 basis points. "It's not massive, because a 25 basis point cut is only a 25 basis cut; this cut is already priced in."
She added that the current rise in inventory is largely due to "life event" moves. Even if mortgage rates get closer to the 6% range, Zhao isn't convinced that homeowners with 4% mortgages will come off the sidelines if they don't need to sell right away.
"A lot of homes traded hands during the pandemic. Are there really that many people who need to move again?" Zhao asked.