Since the Federal Reserve initiated aggressive rate hikes in 2022, inflation rates have considerably improved. However, the housing market continues to face a significant affordability crisis, which could potentially intensify inflationary pressures.
Currently, the housing inventory remains limited, and, despite mortgage rates being lower than the highs of the previous year, they have risen in recent weeks. Mortgage News Daily reported that the latest rate for a 30-year fixed mortgage stood at 6.68%, an increase of 0.53 percentage points from the previous month.
The commencement of the Fed’s rate-cutting cycle has yet to lead to a sustained decrease in borrowing costs, a development anticipated by hopeful homebuyers. Conversely, expectations suggest mortgage rates may remain stable for some time due to robust economic data and caution among Federal Reserve officials, which negatively affect the outlook for further rate cuts.
Freddie Mac aligns with this perspective in its recent housing market report released on Friday. It anticipates mortgage rates will decline “very gradually over time,” with potential fluctuations as unexpected economic developments occur. The report also highlighted that such incremental improvements might not significantly invigorate the housing market, as limited inventory persists and potential homebuyers delay purchases awaiting a more substantial drop in mortgage rates.
Signs indicate a slight reduction in the “lock-in effect,” as falling rates have slightly increased market supply. However, this increase remains insufficient to satisfy high demand, suggesting continued rises in home prices, according to Freddie Mac’s predictions.
The economic outlook, meanwhile, appears favorable. The Federal Reserve’s half-point rate cut is expected to stimulate consumer spending and credit availability. However, the report cautioned about potential risks for inflation to rise again, particularly within the housing sector, where demand continues to outstrip supply, exacerbating the market’s challenges.
An uptick in inflation could further dampen expectations for additional relief from the Fed. Recent consumer price data indicated that inflation was more persistent than anticipated last month, making a substantial rate cut from the Fed less likely. As housing costs constitute a significant portion of expenses factored into official inflation metrics, additional upward pressure in this sector could have notable effects on overall data.
A robust economy and labor market may further limit opportunities for price reductions in other areas, should housing inflation experience a rebound. Some analysts propose that the U.S. economy might not only avoid a recession but could also bypass a “soft landing” slowdown, advancing towards what is described as “no landing.”
Amid ongoing housing market challenges, many Americans reportedly feel trapped. Research by Edelman Financial Engines revealed that over a third (36%) of homeowners feel unable to relocate, with this figure rising to nearly 50% among homeowners under 50, predominantly from Gen Z and millennials.
Even the luxury segment of the housing market is experiencing impediments. The Q4 2024 U.S. market report by Knight Frank, a global real estate consultancy, highlighted that despite a higher presence of cash buyers, elevated borrowing costs are impacting activity within luxury markets as well. Prime buyers, whose wealth is often tied up in various asset classes, are also expressing increased caution due to volatile market conditions intensified by upcoming elections in November.
