I think falling interest rates will have a very limited effect. I think the bigger issue these days is the down payment. When home prices were rising, home owners could sell their house and use the profits as a big down payment on a bigger house. Now that house prices are dropping, the supply of down payments is shrinking as well. My guess is that the money supply is shrinking at a much faster rate than the lowering of interest rates can compensate for.
On top of that, tighter lending standards are demanding a higher percentage down payment. So even though interest rates have been dropping, the cost of securing a loan has been going up.
Of course, I’m just talking about this on a macro level. I’m sure there are situations out there where a bank loan will get approved based on the lower interest rate, but would have gotten rejected otherwise. There’s always going to be cases like that. For those people a 0.5% interest rate cut might make all the difference in the world. House prices will fall just a little less quickly because of it. But I just don’t see it making a huge difference overall.
