There has been a decrease in mortgage rates this week following two reports of inflation that were lower than expected. This has given Wall Street hope that the interest rate increases by the Federal Reserve are having a positive impact. For more than 20 months, Fed officials have been swiftly increasing rates in an attempt to reduce inflation. This has contributed to a crisis in affordability within the housing market by elevating the cost of borrowing to buy a home.Thank you for reading this post, don't forget to subscribe!
With inflation at a low level and the labor market slowing down, many economists now believe that the Fed is prepared to reduce interest rates in the upcoming months. This new outlook has contributed to pushing the average 30-year fixed mortgage rate down to just 7.37% on Friday. This marks a considerable decline from the rate of over 8% a month ago. Real estate specialists are indicating that consumers should anticipate further decreases in mortgage rates until 2024.
“There is potential for more reduction in mortgage rates,” stated Lisa Sturtevant, chief economist at Bright MLS, on Wednesday. She highlighted the historical discrepancy between the 10-year Treasury yield and the 30-year fixed mortgage rate, which usually trade at similar levels.
For distressed home buyers, this could be a significant development, given that soaring mortgage rates along with home prices have risen substantially during the pandemic. This has pushed affordability to the lowest levels in recent years, drawing comparisons to the 18% mortgage rates from the 1980s housing market. However, the decrease in mortgage rates at present doesn’t automatically mean that home prices will also decline.
Reduced rates lead to increased demand
The lower rates will offer some relief to homebuyers, but Sturtevant cautioned that the rush to take advantage of the recent drop in mortgage rates at a time when the supply of homes is “limited” could lead to difficulties. This implies that mortgage rates will not reduce rapidly, “nor will they drop to the levels below 5% that we have had since the Great Recession,” as per Sturtevant.
Citi economist Veronica Clark issued a caution in a note on Friday, expressing her anticipation of “near-term pressure on home prices” due to limited housing inventory and escalating mortgage demand. Morgan Stanley and Goldman Sachs have also projected higher home prices for this year and the following year, respectively.
The rising home prices are likely to counteract the affordability gains made by the recent decline in mortgage rates for consumers, considering how high they have become. Bearing this in mind, Sturtevant mentioned: “For those home buyers who can wait, spring will bring more new listings and lower mortgage rates.”
If mortgage rates decrease sufficiently, it could entice potential sellers to list their homes in the spring – thereby alleviating the lock-in effect that has hindered existing home sales for more than a decade as a result of supply constraints.
Presently, it is still advantageous for renters and sellers
After being in a sellers’ market for several years, the recent decline in mortgage rates is unquestionably “good news” for buyers, according to Jessio Park, US economist at Bank of America. Park cautioned in a note on Thursday that, according to their analysis, renting is still more cost-effective than buying in 95 of the 97 major metro areas. A report recently released by Realtor.com also found that it is less expensive to rent than buy in almost every major market as the rental market continues to soften.
In addition, Park believes that homebuyers will need to consider an “extended period of higher interest rates” for several years, even though housing affordability is likely to improve due to Fed rate cuts. The era of 3% mortgage rates may have come to an end.
However, home builders are not concerned about the demand for new homes despite the affordability crisis. This could be an indication that homebuilders anticipate a more significant drop in mortgage rates than Wall Street does. Total new home starts increased by 1.9% in October, while building permits for the construction of single-family homes rose by 0.5%.
“Builders are increasing construction as they anticipate further reductions in mortgage rates,” stated Quincy Crosby, chief global strategist at LPL Financial, regarding the data. “Builders certainly feel there is a viable market for new housing and they can sell homes fairly quickly.”
Nevertheless, there could be other reasons for the optimism of homebuilders. The new home sales market outperforms the existing home sales market, and homebuilders may offer incentives such as reductions in mortgage rates to encourage consumers to make a purchase.
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