The Fed’s Role
The Federal Reserve is expected to cut interest rates this year, alleviating pressures on any borrowers who recently locked in a rate. Mortgage rates, for example, may fall as the Fed’s stance changes from tightening to loosening monetary policy.
But mortgages are just one piece of the puzzle for prospective home buyers. And there’s another key reason why the market may remain tricky.
The median U.S. home prices remain north of $400,000, or 40% above the pre-pandemic level, according to some estimates.
The primary reason today’s housing market is so unaffordable is a lack of supply. There simply aren’t enough housing units to stem the demand, and the estimates are in the millions. In 2019, before the pandemic-era labor and material shortages, Fannie Mae said 3.8 million was a “good estimate” of the shortage. Other estimates are much higher.
Mortgage rates have contributed to this shortage in that homeowners who locked in historically low rates during the pandemic have little incentive to sell and incur a pricier mortgage to live elsewhere. Other factors, including land-use regulations and the rise of remote work are also leaving their mark on the housing deficit. So lower mortgage rates alone likely won’t fix it.
Lower interest rates could provide some relief to first-time homebuyers, and perhaps spur a short-term flurry in buying activity, which in turn could put renewed pressure on prices.
In its forecast for 2024, Freddie Mac sees more of the same, predicting U.S. home prices on the whole will rise again this year, but that lower mortgage rates will leave a mark over time, potentially improving market conditions for 2025.
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