By Budge Huskey
Chief Executive Officer of Premier Sotheby’s International Realty
The Federal Reserve’s recent quarter-point rate cut, the first since last December, comes at a time when the central bank’s independence, something I feel strongly about, faces growing scrutiny and calls for action are louder than ever. While the Fed maintains its official mandate of taming inflation, concerns about economic resilience, highlighted by weaker-than-expected employment data, ultimately tipped the balance. Markets now widely expect the Fed to deliver as many as two additional cuts before year-end.
Inflation remains an underlying concern. The Producer Price Index, often viewed as one of the most reliable indicators, continues to run hotter than policymakers prefer. For August, the index saw a 2.61% increase year-over-year, according to the Bureau of Labor Statistics. Complicating the topic further, the full impact of tariffs has yet to be felt at the checkout counter. That reality points to upward pressure ahead, an element of inflation that no amount of Fed action can easily blunt since tariffs are not part of the traditional economy.
Most consumers know little about the federal funds rate beyond headlines. It’s the rate at which banks lend to one another, but its ripple effects are broad, influencing everything from credit cards and auto loans to mortgages. Yet mortgage rates more closely follow the 10-year U.S. Treasury yield, which doesn’t always align with the direction of Fed fund rates and is dependent on the sentiment of investors purchasing notes. For now, that sentiment remains encouraging, supporting a positive outlook.
Anticipating Fed action, mortgage rates fell last week to their lowest levels since October, nearly three-quarters of a point off their peak. The response was swift. Mortgage applications surged nearly 30% week-over-week, while refinancing demand soared by almost 60%.
Even with the drop in 30-year fixed rates, adjustable-rate mortgages (ARMs) have maintained a sizable share of new borrowing and the highest since 2008. ARMs currently offer initial rates that are about 0.50% to 0.75% lower than rates for comparable fixed-rate mortgages, though that spread is far narrower than the roughly 2% lower available just a few years ago. Still, longer fixed periods of five to seven years before a reset provide borrowers with more protection against shorter-term volatility.
History provides a clear relationship between mortgage rates and home sales, one supported by extensive research. Economists estimate that each one-point reduction in mortgage rates lifts home sales by roughly 6%. The National Association of Realtors projects an even greater effect, between 10 and 15%, equating to as many as 500,000 additional home sales annually. While estimates vary, the consensus is clear that significant pent-up demand will be released if rates continue to fall. We’re already seeing the positive impact in recent activity and pending sales reports along the Gulf Coast.
Along Florida’s Gulf Coast, the housing supply has normalized to pre-pandemic levels, but many regions across the country remain constrained. For sales to accelerate meaningfully on a national level, many owners must deem mortgage rates low enough to give up their current rate in order to move on with the next chapter of their lives.
A recent Federal Housing Finance Agency study found that for every one-point increase in market rates above a homeowner’s existing loan, the probability of selling drops by 18%. The agency also estimated that 1.7 million transactions were lost over just two years because of this lock-in effect. As a result, mobility rates have fallen to startling lows.
In many Florida markets, there is an elevated level of cash purchases, especially in the $1 million-plus price range. In fact, estimates range upward of 80 to 85% in our luxury sector. Accordingly, one would logically think the impact of lower rates would be muted. However, history suggests rates for borrowing, in general, move in tandem and the overall cost of capital for businesses and individuals is lowered, thereby increasing optimism and a willingness to make significant investments. As a result, housing is a beneficiary.
What level of rates will be enough to reverse this trend? No one can say with certainty, though many believe anything with a 5 in front of the percentage sign would serve as a powerful tipping point for buyers and sellers. With that in mind, we know rates are rarely ever linear but rather vacillate within a range, moving higher or lower by week or even day. It’s the trend over time that matters.
Over the past two years, annual home sales have hovered around 4 million, which is the lowest since the mid-1990s. Elevated borrowing costs have been a barrier, despite being modest in the historical context. Whether 2026 will mark the inflection point for a reinvigorated housing market remains an open question. But one thing is certain: many are hoping lower rates will once again unbridle the real estate market. Count me among them.
