Ultimately, the American housing market is demonstrating signs of relaxation. However, the journey towards recovery is anticipated to be marked by turbulence.
Sky-high mortgage rates and property prices have forced potential home buyers to step back. Moreover, homeowners have been hesitant to list their properties for sale, fearing the possible loss of the low mortgage rates they secured during the pandemic. Consequently, the housing market has been in a sort of standstill. However, speculations of the Federal Reserve cutting interest rates soon have rejuvenated the market.
The standard 30-year fixed-rate mortgage began to decrease earlier this year, plummeting to its lowest level in over a year, as reported by Freddie Mac. This decrease inspired numerous homeowners to refinance their mortgages.
Additionally, positive news arrived on Friday, indicating a 10.1% increase in new home sales last month, reaching their highest level since May 2023, according to the Census Bureau and the Department of Housing and Urban Development.
Furthermore, existing home sales also saw a rise, albeit a modest 1.3%, as reported by the National Association of Realtors. This marked an end to a four-month streak of dwindling sales.
Regrettably, for many individuals hoping to become homeowners, the housing market still appears as dismal as it did during the times when the Fed was still increasing rates.
Affordability concerns persist
July saw a 4.2% rise in existing home prices compared to the same period the previous year, according to NAR. To meet the median priced existing single-family home, a prospective buyer requires an income of around $110,000, as per recent housing affordability data published by the real estate trade association. Three years ago, this income was around $59,000.
The most disheartening news: “Affordability conditions are unlikely to improve significantly,” stated Wells Fargo economists in a note. This is because the housing supply is still lagging behind strong demand, they added. Alongside the cooling labor market and stagnating wage growth, this will "likely limit the potential for a complete recovery in the housing market."
No panacea for the housing market
While lower mortgage rates could alleviate some pressure on the housing market, it might take some time before they decrease sufficiently to provide any meaningful relief. The question now isn’t whether the Fed will lower interest rates, given Fed Chair Jerome Powell's strongest signal of an impending rate cut, but rather how much and how rapidly the Fed will reduce rates. It's uncertain if the standard mortgage rate will fall below 6% this year.
The Fed doesn't directly control mortgage rates, but it does impact them through the benchmark 10-year US Treasury yield. Bond yields typically reduce at developments encouraging the Fed to cut interest rates, such as unemployment rising or inflation moderating. However, they tend to rise at signs that the Fed may maintain rates, like inflation remaining persistent.
Therefore, there needs to be more data or central banker speeches suggesting lower interest rates in the future to prompt a change in mortgage rates. Since early this month, the average mortgage rate has remained almost stationary.
“The topics in Chair Powell’s speech were largely predicted by the market, and I don’t expect mortgage rates to change significantly due to this, as investors had already priced in a rate cut path,” Mike Fratantoni, chief economist and senior vice president of research and industry technology at Mortgage Bankers Association, stated in a note on Friday. “Our forecast continues to anticipate mortgage rates to trend downward closer to 6% over the next 12 months or so.”
Even if mortgage rates fall below 6%, Americans will still have to pay for the most expensive homes in history. The primary determinant of home prices is the supply of homes, which is far from meeting demand. However, there have been some promising developments in this regard: Total housing inventory at the end of July was 1.33 million units, as per NAR data. This is 0.8% higher than in June and 19.8% higher than in the same period the previous year. Housing inventory has improved every single month this year so far.
An almost non-existent inventory of homes on the market is causing the biggest challenge to the US housing market due to its impact on prices. The two leading candidates for the US presidency — Vice President Kamala Harris and former President Donald Trump — have proposed their own solutions to boost housing supply. Trump has suggested using federal land to tackle the housing shortage, while Harris has advocated for the construction of 3 million new housing units.
Experts have told CNN previously that there isn’t a simple solution for America’s exceedingly unaffordable housing market, and a solution could take time and collaboration from all stakeholders.
The decrease in standard 30-year fixed-rate mortgages has encouraged numerous business opportunities in the real estate sector, with homeowners refinancing their loans. However, despite the decrease in mortgage rates and improvement in housing inventory, affordability concerns persist in the economy, with the median priced existing single-family home requiring an income of around $110,000.
