If interest rates go down, do home prices go down? Not quite.

Now that inflation has cooled, the Federal Reserve announced Wednesday that it is cutting interest rates by half a percentage point. That should be welcome news for all Americans in need of a loan: business owners, college students, and anyone looking to buy a home.

Until March 2022, the US enjoyed historically low interest rates. This allowed Americans to lock in an average mortgage interest rate of just under 3 percent in 2021 — a record low. Today, the mortgage interest rate is over 6 percent.

That high mortgage rate made it harder for many Americans to buy a home. It meant that fewer homeowners wanted to sell and, as a result, buyers were competing for fewer homes while also often facing higher monthly mortgage payments.

Because of high mortgage rates and a tight housing market, home sales plummeted from almost 6.5 million in January 2022 to a low of less than 3.8 million in December 2023. Those numbers have only recovered slightly in the months since and remain well below normal levels. Low inventory helped drive up median home prices to $426,900 in June, their highest level ever.

Now, however, many would-be buyers who have been waiting for interest rates to drop may start shopping for a home. But lower interest rates aren’t necessarily going to result in lower prices. In fact, some economists think there is a possibility that home prices — and even rent prices — could actually increase.

“There’s a lot of pent-up demand right now from first-time home buyers, so I wouldn’t be surprised if we don’t see a big shift in prices right after the rate cut because there are a lot of people waiting on the sidelines,” said Julia Fonseca, a finance professor at the University of Illinois at Urbana-Champaign.

In expectation of lower interest rates, mortgage interest rates had already come down from over 8 percent. They could decrease even more if the Fed signals further rate cuts later this year beyond what financial analysts are expecting.

This could lower Americans’ monthly mortgage payments. But housing costs are affected by factors beyond just interest rates. They are also based on availability, and lower interest rates won’t immediately fix this issue. Buyers, especially first-time buyers — who are often competing for a limited supply of starter homes in urban areas — will likely still find that houses are still in short supply.

Part of that is because many homeowners who locked in low rates didn’t want to give those rates up. According to a recent paper by Jack Liebersohn, an economics professor at the University of California Irvine, and his co-author Jesse Rothstein at the University of California Berkeley, higher interest rates meant that homeowners with mortgages were 16 percent less likely to move in 2022 and 2023 than in 2021.

There does seem to be some basis for that hesitation: Lu Liu, a finance professor at the University of Pennsylvania, and Fonseca found that homeowners with a 4 percent locked-in mortgage rate save an estimated $50,000 compared to what they would pay with a new mortgage of the same value at a rate of 7 percent.

As interest rates come down, it should become easier for homeowners to justify selling because they can obtain a comparable mortgage rate on a new home. This might help increase inventory, but perhaps not to a sufficient degree or quickly enough to make up for what is expected to be a big spike in demand from buyers.

Caitlin Gorback, a finance professor at the University of Texas at Austin, said that economic research suggests that, on average, home prices increase by 5 to 10 percentage points for every 1 percentage point decrease in interest rates. Given that, she said, “it is unlikely house prices come down with a rate cut.”

The forces at play in the housing market also have implications for renters. Liu, Fonseca, and their co-author Pierre Mabille of INSEAD suggest in another recent paper that rents could go up if would-be buyers continue to be shut out of the market.

“There is some chance that price pressure is also going to be felt in the rental market,” Liu said.

But there are some long-term factors that could alleviate this pressure. For one, construction of multi-family housing has slowed considerably because of high interest rates, Liebersohn said. Lower interest rates should make it more affordable for developers to get a bank loan to build apartment buildings.

“I’m really hoping that lower interest rates lead to a surge in multifamily construction,” he said. “That won’t have an immediate effect on rents, but it will in the long run, and that could be really important.”

Many apartment building owners also have to get a new loan to finance their properties every 10 years. If they can get new loans at a lower interest rate, some may eventually pass some of the savings down to tenants by not raising their rents as much as they would otherwise.

Both of those factors may be slow-moving, but overall, “it means that if the path of interest rates going forward is lower, then renters will benefit,” Liebersohn said.

Update, September 18, 2:20 pm: This story, originally published September 17, has been updated to reflect the Fed’s announcement of a rate cut.