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The Federal Reserve is widely expected to cut the Fed Funds rate soon, and many in real estate and financial media are quick to assume this will spark a wave of lower mortgage rates and reignite housing demand. But the connection between the Fed’s short-term rate and long-term mortgage rates is not nearly as straightforward as it sounds—and focusing on that headline number risks missing the bigger picture.
Mortgage Rates Don’t Simply “Follow the Fed”
The Fed Funds rate is the overnight lending rate between banks, not the direct determinant of mortgage rates. While Fed policy can influence long-term rates, mortgage rates are far more tied to broader bond market dynamics, inflation expectations, and investor appetite for mortgage-backed securities. In fact, history shows mortgage rates often move in anticipation of Fed actions, not after them. This means a rate cut doesn’t automatically translate into cheaper borrowing for homebuyers.
Economist Richard Werner, best known for Princes of the Yen, has long argued that interest rates are more a reflection of the underlying economy than a driving force. In other words, the Fed may be chasing economic conditions, not shaping them. If the real economy is slowing, rates fall as a consequence—not because the Fed commands them lower.
The Bigger Driver: Money Supply (M2)
Steve Hanke, a Johns Hopkins economist, emphasizes the importance of the money supply—specifically M2—as a leading indicator of economic health. During the COVID pandemic, M2 exploded with trillions of dollars in stimulus and credit expansion, fueling asset prices, including housing. That massive surge in liquidity coincided with one of the steepest jumps in median and average home prices in U.S. history.
But the tide has turned. M2 growth has not only slowed—it has contracted in real terms. When the money supply shrinks, credit becomes scarcer, lending tightens, and demand weakens. This dynamic matters far more to the housing market than whether the Fed shaves off a quarter or half a point from its benchmark rate.
Why Asset Bubbles Must Correct
Werner’s research in Princes of the Yen centers on the idea that asset bubbles are fueled by credit creation, and when that credit dries up—usually in a recessionary environment—bubbles deflate. The post-COVID housing boom has all the hallmarks of a credit-fueled bubble: rapid price escalation, fueled by easy money, low rates, and unprecedented liquidity injections.
Now that liquidity is being drained and credit conditions are tightening, a correction becomes not just possible but likely. Rate cuts can slow the pain, but they cannot reverse the fundamental mechanics of contracting money supply and reduced credit creation.
The Hard Reality for Housing
The median home price in the U.S. has surged over 40% since 2019. Even if mortgage rates fall by a percentage point or two, affordability remains at historic lows because prices are simply too high relative to incomes. In markets like Atlanta’s East Cobb and Sandy Springs, median home prices have leapt so dramatically since the pandemic that modest rate cuts do little to bridge the gap for buyers.
Unless we see a reversal in money supply contraction or a wave of new credit creation, demand will remain suppressed. And if Werner is correct, asset bubbles like housing don’t “soft land”—they correct.
Bottom Line
A Fed Funds rate cut will generate headlines and perhaps a brief bump in market sentiment. But the real levers of the housing market—credit creation and money supply—are moving in the opposite direction. As Steve Hanke warns, shrinking M2 signals a contractionary environment. And as Richard Werner reminds us, asset bubbles built on credit always correct when the credit cycle turns.
For housing, that means we may be heading into a market that rate cuts alone cannot rescue.
