Lower interest rates could help buyers across the state qualify for home loans, but affordable mortgages are only a single factor in easing a housing crisis in Wyoming caused primarily by low supply.

On Sept. 18, the Federal Reserve announced it would lower interest rates by half a percentage point, setting its target range to 4.75% to 5%. Interest rates on mortgages began to fall even before the announcement. 

Lower borrowing costs for home buyers, some say, could lead to a surge in buyers who are looking for homes. The nationwide housing crisis has been, in large part, driven by a lack of housing supply, and increasing the number of buyers in the market could lead to a higher demand for an already-limited supply of housing.

How does the lending market actually work?

When the Federal Reserve lowered interest rates by half a percentage point to 4.75%-5%, Jerome Powell, chair of the Federal Reserve, described the move as a “calibration” of the central bank's policy rather than an indication of concerns about the labor market's health.

The immediate effect on mortgage rates appears limited because markets had already factored in the change, “staying relatively steady after the announcement,” Christopher Volzke, deputy executive director of the Wyoming Community Development Authority, said.

The Federal Reserve sets a “floor” on interest rates for all kinds of lending, from auto loans to credit card loans to mortgages, according to University of Wyoming Associate Professor in the Economics Department Rob Godby. Every other interest rate is layered on top of that, based on the characteristics of the borrower and the loan itself, Godby said. Because mortgages are long-term commitments, interest rates are often based on 30-year treasury rates.

“This cut helps,” Godby said on Wednesday. “The bottom line is that interest rates have already fallen on mortgages, but they’re still relatively high.”

As of Oct. 1, a 30-year fixed average mortgage was 6.1%, down from over 7% in May of this year.

“It has already fallen, and the reason it has fallen is not because this specific rate cut occurred, but it’s understood that the Federal Reserve will, barring some major change in the economy, continue to cut rates for some time. If you look at their projections, they see their long-term interest rates falling,” Godby explained.

By 2026-2027, rates may fall by 40%, meaning mortgages could be around the high 4% range, or below 5%, as early as next year. They could be below 4% — but not far below 4% — a year after that, Godby said, cautioning that his numbers were estimates.

Short of having a recession that’s so serious that interest rates at the Federal Reserve go down to zero, home buyers will not see 2.8% or 3.5% mortgage rates again — which was the rate nearly a decade ago. 

The best borrowers in the country are likely to secure an interest rate in the 4% range, which is historically normal, according to Godby. Typically, a 30-year mortgage will have an interest rate of about a percent and a half above the Federal Reserve rate: If that rate is 2.9%, the best mortgage rate would fall in the 4% range.

What does it mean for housing in Wyoming?

Homebuyers do have reason to be optimistic going into 2025, as declining rates can assist with affordability, Volzke said. Housing sale prices remain elevated, though, and represent the other half of the equation when calculating that final monthly mortgage payment. 

In 2018, before the pandemic, the statewide median housing price was roughly $228,000. Today, the statewide median house sale price is closer to $332,000.

“So even with rates starting to soften, the amount of mortgage debt to be financed is considerably higher than it was a few years back,” Volzke said.

A decline in interest rates over the course of the next year could help with financing costs, but it also may have the “unintended consequence” of bringing more competition to the limited housing stock in Wyoming, Volzke said.

“More competitive rates could pull some would-be homebuyers that have been sitting on the sidelines due to perceived higher rates back into the house hunting group,” Volzke said. “Until more housing inventory can be brought to market, the declining rates can assist, but not solve, the housing affordability problems we are experiencing.”

Godby shared similar thoughts, but said that lower interest rates could mean an uptick in building.

“When you’re a builder, you finance the building of homes with loans,” he said.

When builder loans are at higher interest rates, fewer companies are willing to take the risk to borrow as much to build more homes, meaning high interest rates have had the effect of reducing the amount of new homes in the market.

“No matter how many homes a builder wants to build, higher interest rates make it harder to do that, because the borrowing cost of building subdivisions becomes more burdensome. When it costs more, they build less,” Godby said.

A second impact higher interest rates have had on the supply of houses on the market in Wyoming is something Godby called the “lock-in effect.” 

Homeowners who may want to list their homes have likely avoided doing so in recent years, because many with an interest rate of 4% would not want to finance a new home loan at 7%.

“A lot of people are staying put. That ‘lock-in effect’ is having a really significant effect on the supply of homes available,” Godby said. “The biggest part of the market is not new homes, but existing homes.”

Other programs remain necessary

Certain markets will continue to be challenged regardless of interest rates, Godby said. 

Places like Jackson, Sheridan and even Laramie struggled with affordability before the pandemic. Easing conditions in those markets doesn’t necessarily make it easy to finance or purchase a home — it simply makes it less hard, Godby said.

“You can identify the markets where, even when interest rates were incredibly low, housing affordability was still a real challenge. Those are very often resort communities, high amenity communities or communities that experience high growth,” Godby said. “Those structural issues are very difficult to solve.”

Communities like this must continue to incentivize affordable housing programs aimed at helping the local labor force purchase a home, as well as supporting developers willing to build affordable housing.

“Affordability is a real challenge in some places, and Jackson is of course the poster child. That is Sheridan and Laramie as well,” Godby said. “You’re often talking about a need to really reduce the cost of housing for essential service workers like police, fire, teachers, who just don’t make salaries that can typically afford a home the way they could in other places in the state.

“In those situations, you have to talk about adding to the housing stock through special programs, subsidies and income support,” he said.