Federal Reserve officials plan to cut interest rates this year, real estate agents are likely to cut their commissions after a major settlement, and President Biden has begun looking for ways his administration can reduce high housing costs.
In short, a lot of changes are happening in the housing market. While sales have slowed markedly amid higher interest rates, both home prices and rents remain significantly higher than before the pandemic. The question now is whether recent developments will reduce costs.
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 drop in most markets, especially home purchases. Demographic trends are still fueling steady demand, and cheaper mortgages could lure buyers into a market that still has too few homes for sale, even as lower interest rates could help attract more supply to the extremes.
“It’s almost impossible for me to imagine that home prices will actually fall,” said Glenn Kelman, CEO of Redfin. “The inventory constraints are so deep.”
See what’s changing and what it could mean for buyers, sellers and renters.
Interest rates are expected to decrease.
Mortgages have been expensive lately, in part because the Fed raised interest rates to a more than two-decade high. The central bank does not set mortgage rates, but its policy moves gradually to make borrowing more expensive across the economy. Rates on 30-year mortgages are hovering just below 7 percent, down from below 3 percent as recently as 2021.
Those rates could fall when the Fed lowers borrowing costs, particularly if investors expect it to cut rates more sharply than they currently expect.
Mortgage rates and some other borrowing costs tend to adjust when investors change their expectations of what the Fed will do, rather than when the central bank actually makes a move. That’s one reason mortgage rates have come down from their peak of around 7.8% in late 2023: Inflation has subsided and it’s become clear that the Fed could soon cut its policy rate.
Central bankers predicted on Wednesday that they could make three rate cuts this year and another three next year.
Some analysts believe mortgage rates could fall further in 2024. Greg McBride at Bankrate, for example, thinks they could end the year around 6%.
Cheaper borrowing costs will have two major effects on the housing market. First, they make it slightly less expensive to finance a purchase: The monthly payment on a $400,000 mortgage at 7.8 percent is about $2,880, but more than $2,400 at 6 percent. Such a reduction could boost demand from would-be buyers.
Second, lower prices could encourage more homeowners to sell. Many Americans are sitting on cheap mortgages they refinanced during the pandemic and are reluctant to give up to move. The narrower the gap between these existing mortgages and market mortgage rates becomes, the more this rate lock can disappear — potentially making more starter homes available.
Realtor practices are poised to change.
It’s not just the cost of borrowing that could affect the housing market. The National Association of Realtors, a powerful group that has long set the guidelines for home sales, has agreed to settle a series of lawsuits in a move that could shake up the housing market.
Pending court approval, the settlement will mean agents working with home sellers will no longer have to offer clearly advertised compensation to buyers’ agents. The change is likely to reduce the standard commission across the industry by 5 or 6 percent.
It is unclear exactly what this will mean for the cost of the home. There is speculation that it could lower prices, in part because lower commissions could make it slightly more attractive for sellers to list their homes.
But there are limits to how far prices can go. Igor Popov, chief economist at Apartment List, said that while the ruling could save Americans money in transaction costs, home sellers are likely to continue trying to charge as much as they can in competitive markets.
“It’s a big deal for the industry, but I don’t think it’s a big deal for prices and volumes,” he said.
Agents are unsure of what the outcome will be. Jovanni Ortiz, a Realtor on Long Island, said he had heard colleagues wondering if agents might go out of business — but no one was sure exactly how much that would cost agents and reshape home buying.
“It’s still too early to tell,” Mr. Ortiz said.
The White House has policies in mind.
President Biden has focused on high housing costs in recent weeks, wary that Americans’ struggles to rent or buy a home are weighing on the nation’s economic optimism.
He announced new ideas to help homebuyers in his State of the Union address. His latest budget request contains more than $250 billion in spending proposals to address high housing costs, including building or rehabilitating two million homes and increasing rental assistance for low-income workers.
But most of these ideas seem unlikely to have an immediate impact: There appears to be little chance that a major housing bill will pass this year, with November’s elections looming and Republicans in control of the House.
But Mr. Biden has asked his administration to act unilaterally to reduce some of the costs associated with buying a home. It has moved to eliminate title insurance fees for federally backed mortgages, potentially saving $1,000 or more per purchase. This week, he called on estate agents to pass the savings from lower required fees on to consumers.
Housing supply is rising at rents, but that could be short-lived.
If there’s one bright spot in housing affordability right now, it’s the rental market.
The severe supply crunch has been easing in recent months, allowing rents for new leases to rise only modestly or even fall in some markets.
A flurry of large rental buildings were built in some cities in the South and the Mountain West, taking pressure off monthly rates. But relatively little new inventory is coming in next year and 2026, Mr. Popoff said, so that should limit the slack.
The supply of homes for sale is a less sunny story. It’s not just that fewer sellers are putting homes on the market — homebuilding has been hit by higher interest rates. That has exacerbated a shortage that has been worsening for years and means prices have remained high even as high mortgage rates have dampened sales of both new and existing homes.
As builders see signs of the market thawing, they may be more willing to build new homes. But that will happen as many buyers are likely to be tempted by slightly lower prices.
“Demand is so strong that the housing market is unlikely to collapse,” said Yelena Shulyatyeva, senior economist at BNP Paribas, noting that many millennials are still looking to buy, among other trends.
The result; Mr Popov believes the housing market could return to something more like normal in the coming months – prices are unlikely to fall, but increases may be slower and steadier than the big bounces from 2020.
“We’ve felt the aftershocks of the many strong impacts on the housing market brought about by the pandemic,” he said. “We will return to more normal numbers and a more normal feeling in the housing market.”
