Fed Chair Jerome Powell sent a clear message Wednesday, reiterating that the Federal Reserve is still leaning toward lower rates—and for the sluggish U.S. housing market, that could be the break it's been waiting for.

Powell’s latest speech struck a dovish tone, citing continued labor market weakness and global risks—like tensions with China and softening economic activity—as justification for further easing.

"The rising downside risks to employment have shifted our assessment of the balance of risks," he said, referencing the rationale behind September’s rate cut and hinting at more to come.

According to CME FedWatch data, markets now price in a near certainty of another 25-basis-point cut at the Oct. 30 meeting, with 95% odds of a second cut in December—bringing the federal funds rate closer to 3.50%-3.75%.

Regional Banks React First—Will Housing Be Next?

One of the first corners of the market to respond was regional banking.

The SPDR S&P Regional Banking ETF rose 3.6% on Wednesday, following a 2.2% gain on Tuesday, marking its best two-day rally since November 2024—right after Donald Trump's victory in the 2024 presidential election, which sparked bets on deregulation and deal-making within financial players.

But attention is now turning to real estate, where rate sensitivity is even more pronounced.

The big question: Will the housing market finally roar back to life?

Mortgage Rates Still a Barrier

Mortgage rates have hovered north of 6% for nearly three years. While this level is far off the pandemic-era lows, it remains high enough to keep activity subdued, with buyers constrained by affordability issues and mortgage lock-in effects.

"Housing markets in the U.S. are just frozen by low affordability and high interest rates," said Bank of America analyst Aditya Bhave.

Existing home sales in 2025 are averaging just 4 million annually—levels not seen since the aftermath of the 2008 crisis.

A potential game-changer? A 30-year mortgage rate closer to 5%, which many in the industry view as a threshold that could begin to “unfreeze” housing.

According to Bhave, such a move could improve affordability by roughly 15% for first-time buyers and reduce the disincentive for existing homeowners locked into sub-4% mortgages.

But achieving that level won't be easy. BofA rates strategist Ralph Axel highlights that "Fed policy doesn't matter that much for housing" because mortgage rates are tied more closely to long-dated yields, not short-term Fed rates.

To achieve a 5% mortgage rate, we'd likely need to see the 10-year yield drop from 4.15% to around 3.25%, along with a narrowing of the mortgage-Treasury spread.

That would require a deeper rate-cutting cycle, and possibly more aggressive tools, such as yield curve control or renewed quantitative easing.

A Supply Problem at the Core

Beyond rates, the housing market is constrained by supply. According to David Michael Tinsley, senior economist at Bank of America Institute, many homeowners are "locked in" with low effective mortgage rates and have no incentive to move.

But if mortgage rates fall to the 5% range, existing home supply could rise by 20%-30%, Tinsley said.

That could put downward pressure on housing price inflation, finally making the market more accessible again.

What About Real Estate Stocks?

So far, real estate stocks have lagged. The Real Estate Select Sector SPDR Fund is up just 1.5% year-to-date, far underperforming the S&P 500's 15% gain.

But Bank of America analyst Jeffrey Spector sees potential upside. "Real estate is getting support from declining rates and low new supply," he said.

Spector indicates that an easing cycle could boost distributions, improve cash flows, and reverse the refinancing headwinds that have plagued real estate investment trusts (REITs) in recent years.

He highlights four REIT segments as most resilient, even if the “AI hype” fades: residential, backed by demographics and housing undersupply; industrial, supported by e-commerce and reshoring; healthcare/senior housing, tied to aging populations; and necessity retail, like grocery-anchored centers.

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Image created using artificial intelligence via Midjourney.