What’s next for the housing market?

Federal Reserve officials plan to cut interest rates this year, real estate agents are likely to lower their fees after a large settlement, and President Biden has begun exploring ways for his administration to ease high housing costs.

So there’s a lot of change happening in the housing market. Although sales have slowed significantly due to rising interest rates, home prices and rents are both still significantly higher than they were before the pandemic. The question now is whether recent developments will reduce costs.

Economists who study the housing market said they expect costs to rise relatively slowly over the next year. But they don’t expect prices to actually fall in most markets, especially the home-buying market. Demographic trends continue to stimulate robust demand, and cheap mortgages still mean there are fewer homes for sale, even if lower interest rates may help attract more supply in surrounding areas. It could lure buyers into a market that is too small.

“It’s become almost impossible to imagine that home prices will actually go down,” said Glenn Kelman, Redfin’s chief executive officer. “Inventory constraints are very severe.”

Here’s what’s changing and what it means for buyers, sellers and renters.

Interest rates are expected to fall.

Mortgage prices have soared recently, in part because the Federal Reserve raised interest rates to the highest levels in more than 20 years. Central banks do not set mortgage rates, but their policies trickle down to make borrowing more expensive across the economy. 30-year mortgage rates are hovering just below 7%, up from less than 3% recently in 2021.

Those rates could fall if the Fed lowers borrowing costs, especially if investors come to expect more significant rate cuts than currently expected.

Mortgage rates and some other borrowing costs tend to adjust when investors change their expectations of the Fed’s actions, rather than when the central bank actually takes action. This is one reason why mortgage rates are falling from a peak of about 7.8% in late 2023. Inflation is easing, and it has become clear that the Fed may soon lower interest rates.

Central bankers predicted on Wednesday that there could be three rate cuts this year and three more next year.

Some analysts believe mortgage rates could fall further in 2024. Bankrate’s Greg McBride, for example, thinks it could end the year at around 6%.

Lower borrowing costs will have two major effects on the housing market. First, it will be slightly cheaper to finance the purchase. His monthly payments on a $400,000 mortgage at 7.8% are about $2,880, but at 6% he would pay about $2,400. Such a decline could stimulate demand from potential buyers.

Second, lower interest rates could encourage more homeowners to sell. Many Americans have cheap mortgages they refinanced during the pandemic and are hesitant to sell them and move. The smaller the difference between existing mortgage rates and market mortgage rates, the more likely rate lock-in will be removed and more starter homes will become available.

Broker practices are about to change.

Borrowing costs aren’t the only thing that can affect the housing market. The National Association of Realtors, the influential group that has long set guidelines for home sales, has agreed to settle a series of lawsuits that could jeopardize home purchases.

Pending court approval, the settlement will eliminate the need for agents working with home sellers to provide clearly advertised compensation to buyers’ agents. This change could reduce industry-wide standard commissions of 5 to 6 percent.

It’s not clear exactly how that will affect housing costs. There is also speculation that lower fees could make it slightly more attractive for sellers to list their homes, leading to lower prices.

However, there is a limit to the decline in prices. Igor Popov, chief economist at Apartment List, said the decision could save Americans on transaction costs, but it could encourage home sellers to continue setting prices as high as they can in a competitive market. Said it was expensive.

“It’s a big deal for the industry, but I don’t think it’s a big deal in terms of price and volume,” he said.

Agents aren’t sure what the aftermath will be. Giovanni Ortiz, a Long Island real estate agent, said he has heard his colleagues wonder if his agency is going out of business. But he said no one knew exactly how much this would cost agents or change the way people buy homes.

“It’s still too early to say that,” Ortiz said.

The White House has policy in mind.

President Biden has been fixated on rising housing costs in recent weeks, saying Americans struggling to make rent or buy a home are weighing on the country’s economic optimism. I’m on guard.

In his State of the Union address, he announced new ideas to help homebuyers. His latest budget request includes more than $250 billion in proposed spending to address high housing costs, including building and renovating 2 million homes and increasing rent subsidies for low-income workers. ing.

But most of these ideas seem unlikely to have any immediate effect. With the November election looming and Republicans in control of the House, there appears to be little chance of passage of any major housing legislation this year.

Still, Biden has directed his administration to act unilaterally to reduce some of the costs associated with buying a home. He is moving to eliminate title insurance premiums on federally backed mortgages, potentially saving more than $1,000 on every purchase. This week he called on real estate agents to pass on the savings from required fee reductions to consumers.

The supply of rental housing is increasing, but that may not last.

If there’s a bright spot in housing affordability right now, it’s the rental market.

The severe supply shortage has eased in recent months, with rents for new leases rising only modestly or even falling in some markets.

Many large rental buildings were built in some cities in the South and Mountain West, relieving pressure on monthly bills. But Popov said the cooldown could be limited as new inventory will be relatively low next year and in 2026.

The story regarding the supply of condominium housing is not very bright. Not only are there fewer sellers putting their homes on the market, but rising interest rates are hurting home construction. This is exacerbating a housing shortage that has worsened in recent years, and means prices remain elevated even as high mortgage rates suppress sales of new and existing homes. ing.

Builders may be more motivated to build new homes as they see signs of a thaw in the market. But it will, as many shoppers are likely to be attracted to slightly lower rates.

“The housing market is unlikely to collapse because demand is so strong,” said Elena Shulyatyeva, senior economist at BNP Paribas, noting that many millennials are still considering buying.

Result is? Popov believes the housing market could return to something close to normal in the coming months. Prices are unlikely to fall, but the rise could be slow and stable compared to the large rise since 2020.

“We are feeling the aftershocks of many of the major hits to the housing market caused by the pandemic,” he said. “The housing market will return to more normal numbers and a more sense of normalcy.”