While home prices have proved surprisingly resistant to the negative demand effects of the Federal Reserve’s dramatic rate-hike campaign, the housing market and its perceived resilience has come at a steep cost: housing affordability. According to some measures, housing affordability is at its worst level since 1984.
According to the National Association of Realtors, the median sale price for an existing home was $406,700 in July, the highest level ever recorded in the seventh month of the year. Meanwhile, 30-year mortgage rates have climbed to 7.49%, the highest level in over two decades.
As such, the notion that housing affordability is quickly deteriorating is increasingly valid, especially considering still pesky inflation and historically stagnant wages.
Unfortunately, the issue is unlikely to resolve itself in a timely matter. The market’s tight inventory of available homes has largely propped up home prices for the past several years. Indeed, the U.S. frequently has just a 3.3-month supply of available homes for sale, well below the 6-month supply standard of a balanced real estate market. This means that despite the Fed’s drastic rate-hike campaign and its subsequent effects on Treasury yields, mortgage rates, and housing demand, home prices have remained steadfast–or even climbed from last year, depending on where you live.
With the future of housing in the hands of the infamously hawkish Fed, things are unlikely to ease unless something breaks down, be it lending rates, consumer strength, or even the U.S. economy entirely. Maybe all three.
With that in mind, what do some of the country’s top firms expect from the housing market through the latter half of the year?
Housing Market Predictions
Well, tracking the future trajectories of the housing market requires first making some assumptions regarding the Fed and anticipated monetary policy.
Under the assumption that the Fed’s eleven rate hikes this cycle constituted the entirety of the central bank’s tightening process, mortgage rates may be liable to ease going forward. Given such a hypothetical, lower rates may spur seller activity, easing the pinched housing inventory, which would bring back housing demand and ultimately result in lower home prices.
“Lower mortgage rates would help spur home sales activity, which are expected to increase in 2024 compared to 2023,” Selma Hepp, chief economist at CoreLogic, told Bankrate. “Declines in mortgage rates will drive more sellers to trade their existing home and help add much needed inventory to the market, leading to more transactions.”
However, according to Chen Zhao, head of economics at Redfin, it’s unlikely the 30-year falls below 6% in the near future, even if the Fed ceases any monetary changes. This would limit sellers’ return to the market and generally inhibit the entire rebalancing process.
“Housing sales are expected to increase a bit from this year,” Zhao said. “However, we are not expecting sales to increase dramatically, as rates are likely to remain above 6 percent.”
On the other hand, should the Fed raise rates even more before year-end, which is an increasingly likely possibility according to a growing number of Fed economists, housing affordability is expected to take a turn for the worst. Rising mortgage rates would push sellers away from financing a new property, further impeding any potential reduction in home prices. With higher rates and perpetually elevated prices, this would be the worst-case for home affordability.
Recession May Be Only Path to Improved Housing Affordability
While rising mortgage rates would likely convince sellers to stay put rather than battle for a new, likely higher-rate mortgage, this assumes it’s even possible for a potential seller to continue paying down their current mortgage. Indeed, should the U.S. economy take a turn for the worse, as many economists predicted entering 2023, some sellers may be forced to sell their homes due to lower household income, rising costs, or any mix of the two.
Should a recession hit the country, demand for homes will likely sink. Combined with a resurgence of down-on-luck sellers, it may provide the conditions necessary to improve affordability. While it isn’t a pleasant possibility, it represents one of the few true ways real estate prices return from orbit.
According to Michael Gayed, publisher of the Lead-Lag Report, even something like the return of student loan payments could trigger this housing market pullback:
“So you have the student loan repayments. That probably hurts the hospitality side because now there’s less cash flow to go around for traveling. That hurts the Airbnb players, the owners, because now they’re not getting income from their second, third, fourth properties. That might result in some selling of those second, third and fourth properties. And that then maybe sparks a broader inventory unleash in the housing market.”
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
