Federal Reserve officials plan to cut interest rates this year, real estate agents are likely to cut commissions after a major agreement, and President Biden has begun looking at ways the administration can ease high housing costs.
In short, many changes are taking place in the housing market. Although sales have slowed noticeably due to rising interest rates, both home prices and rents remain sharply higher than before the pandemic. The question now is whether recent developments will save money.
Economists who study the housing market said they expect cost increases to be relatively modest next year. But they don't expect prices to actually fall in most markets, especially for home purchases. Demographic trends are still driving strong demand, and affordable mortgages can lure buyers into markets where there are still too few homes for sale. Even though lower interest rates help drive more supply from surrounding areas.
“It has become almost impossible to imagine home prices actually falling,” said Glenn Kelman, Redfin CEO. “There are too many constraints on inventory,” she said.
Here's what's changing and what it could mean for buyers, sellers and renters.
Interest rates are expected to fall.
One reason mortgages have been expensive recently is because the Federal Reserve has raised interest rates to the highest level in 20 years. Central banks don't set mortgage interest rates, but their policies nudge them across the economy to make borrowing more expensive. The interest rate on a 30-year mortgage recently rose from less than 3% to less than 7% in 2021.
These rates could move lower if the Fed lowers borrowing costs, especially if investors expect it to cut rates more significantly than they currently expect.
Mortgage rates and other borrowing costs tend to adjust when investors' expectations about what the Fed will do change, not when the central bank actually moves. This is one reason mortgage rates are coming down from their late 2023 peak of around 7.8%. Inflation has eased and it has become clear that the Fed may soon cut policy rates.
Central bankers on Wednesday expected they could cut interest rates three times this year and three more next year.
Some analysts think mortgage rates could fall further in 2024. For example, Bankrate's Greg McBride thinks you could end the year up about 6%.
Making borrowing cheaper will have two major impacts on the housing market. First, financing the purchase has become slightly cheaper. The monthly payment on a $400,000 mortgage at a 7.8% interest rate would be about $2,880, but at a 6% interest rate it would be closer to $2,400. This decline could stimulate demand from prospective buyers.
Second, lower interest rates may encourage more homeowners to sell. Many Americans are taking advantage of cheap mortgages they refinanced during the pandemic and are hesitant to give up on moving. The smaller the gap between conventional and market mortgage rates, the more rate lock-in can be eliminated and potentially more starter homes available.
Brokerage practices are ready to change.
It's not just the cost of a loan that can affect the housing market. The National Association of Realtors, a powerful group that has long set guidelines for home sales, has agreed to settle a series of lawsuits in a move that could shake up home buying.
Pending court approval, brokers working with home sellers under the agreement will no longer be required to provide clearly advertised compensation to buyer brokers. This change is likely to lower industry standard fees by 5-6%.
It's unclear what this means for housing costs. There is speculation that prices may be lowered in part because lower fees may make it slightly more attractive for sellers to list their homes.
However, there is a limit to how low prices can be. Igor Popov, chief economist at Apartment List, said the decision will save Americans on transaction costs but will keep home sellers trying to charge as much as possible in a highly competitive market.
“It’s a big problem for the industry, but I don’t think it’s a big problem in terms of price or volume,” he said.
Agents aren't sure how the fallout will play out. Jovanni Ortiz, a Long Island real estate agent, said he hears his colleagues wondering if their brokers will go out of business. But no one knows exactly how much this will cost brokers and reshape home shopping, he said.
“It’s still too early to tell,” Mr. Ortiz said.
The White House has policy in mind.
President Biden has been fixated on high housing costs in recent weeks, warning that Americans' difficulty making rent or buying a home is weighing on the nation's economic optimism.
In his State of the Union address, he announced new ideas to help homebuyers. His latest budget request includes more than $250 billion in spending proposals to address high housing costs, including building or rebuilding 2 million homes and increasing rental assistance for low-income workers.
But most of these ideas are unlikely to have an immediate effect. With the November election approaching and Republicans controlling the House, it seems unlikely that any major housing legislation will be passed this year.
Nonetheless, Mr. Biden has directed his administration to act unilaterally to reduce some costs associated with purchasing a home. He moved forward by eliminating title insurance fees on federally backed mortgages, saving more than $1,000 per purchase. This week he called on real estate agents to pass on the savings to consumers by lowering the fees they require.
The supply of rental housing is increasing, but this may be short-term.
If there's one bright spot in current affordable housing prices, it's the rental market.
Severe supply shortages have eased in recent months, allowing rents for new leases to rise modestly or even decline in some markets.
In some Southern and Mountain West cities, many large rental buildings have been built, relieving pressure on monthly prices. But relatively small amounts of new inventory are expected next year and into 2026, which could limit the cooldown, Mr. Popov said.
The supply of homes for sale is a less bright story. Not only have there been fewer sellers putting their homes on the market, but home construction has also been hurt by high interest rates. This has exacerbated a shortage that has been worsening for years and means prices have continued to rise even as high mortgage rates have dampened sales of both new and existing homes.
Builders may be more willing to build new homes if the market shows signs of thawing. But that will happen, as many shoppers will likely be attracted to a slightly lower price.
“Demand is so strong that it is unlikely that the housing market will collapse,” said Yelena Shulyatyeva, chief economist at BNP Paribas, noting that many millennials are still looking to buy, among other trends.
result? Mr. Popov thinks the housing market could return to something more normal in the coming months. Prices are unlikely to fall, but the rise may be slower and more steady compared to the big rebound after 2020.
“We are feeling the aftershocks of many of the hard hits to the housing market that the pandemic has brought,” he said. “We’re going to get back to more normal numbers and a more normal feeling in the housing market.”