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At the last two Federal Reserve Board meetings, the agency cut the federal funds rate — for a total of 0.75%. You might think this means all interest rates will automatically drop by that same amount, but that’s not really how it works.

The federal funds rate is just the rate at which banks lend money to each other in the short term, but it does tend to indicate where mortgage rates and other commercial interest rates will go in the future.

And this influences home prices and the activity level of the housing market. So, what does the federal rate cut mean for home prices right now? Let’s walk through it.

Short-term prediction: Almost no change or worse

Right now, the 30-year fixed rate mortgage is sitting at 6.78%, which is up 0.70% over its most recent low in September 2024, prior to the beginning of rate cuts. As of the end of Q3 2024, the median sales price is sitting at $420,400, which is down from its high of $442,600 in Q4 2022. Although that sounds like a lot of change, it’s actually only about a 5% drop, so home prices are more or less steady and have been for a while.

Even with the cut in the federal funds rate, mortgage interest rates have only gone up, which is terrible for home prices and home buyers. According to Freddie Mac research, over 60% of mortgages have interest rates at or below 4%. That means there are a lot of homes that aren’t going to go up for sale any time soon because homeowners aren’t really going to see a net gain by selling their current homes.

Even if those homeowners religiously checked home mortgage rates, the best mortgage rates they’d find would be significantly higher than what they’re paying now. It doesn’t make financial sense to them to sell.

So, for now, we’re still locked in a battle against tight inventory that doesn’t look like it’s going to end any time soon. Some local areas may be seeing this improve a bit, but nationally, there are only three months of supply out there for sale, and houses that are sold are still hotly competitive.

This points to no change in home prices in the short term and a risk of prices increasing again if more buyers jump into the pool without a house to sell themselves.

Long-term prediction: Housing prices may fall relative to incomes

The short-term outlook is pretty bleak no matter who you ask. But in the longer term, things are likely to be a bit better. When I say longer term, though, we’re talking about years and not months.

Eventually, mortgage interest rates should catch up to the overall interest rate trends and cool somewhat. They have to cool pretty significantly to free enough of those 60% of homeowners locked in their golden handcuffs to move the needle, though. I do think that will happen — or people will simply age out of their homes and put them up for sale when they have to move to assisted living or other supportive senior housing.

Boomers and older Gen Xers have been reluctant to give up their homes and are instead making changes to them so they can stay in place longer, but time stops for no man. When this happens, it will be a slow trickle at the same time that more housing is being built to combat shortages, but it all flows into the same pool.

A significant gain in housing availability will push prices lower relative to incomes, and finally, the people who’ve been waiting on the sidelines to buy a home will be able to get into something they can afford. But again, this is a matter of years, not of months, so if you’re shopping for a house now, it’s still going to be rough out there.

What you can do today to buy a home you can afford

Don’t panic about this news — you can buy a house now. There’s nothing saying that you can’t. But you may have to make some adjustments to your overall game plan. Consider:

• Choosing a home farther from city centers, where prices are lower
• Looking at homes that may need some repairs or updates
• Buying in a small town that’s within reasonable commuting distance to your work
• Picking a multi-family building or a home with a room or accessory unit you can rent out for extra income

But first, meet with a few mortgage lenders to get prequalified for a home loan. Check out our list of some of our favorite lenders — it’s a great place to get started.

Being prequalified leaves you with no doubt of what you can afford and what your money can buy, which aren’t always the same thing. That way, you can focus your efforts on the houses that make sense for you. No matter what housing prices are doing, you can only afford what you can afford, so focus on the factors that matter to you and not the overall market trends.

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Motley Fool Money does not cover all offers on the market. Editorial content from Motley Fool Money is separate from The Motley Fool editorial content and is created by a different analyst team.Kristi Waterworth has no position in any of the stocks mentioned. The Motley Fool recommends Flow. The Motley Fool has a disclosure policy.