Both homebuyers and renters could feel some relief later this year as home prices stabilize, mortgage rates fall and rental growth slows further.
Economists expect the Federal Reserve to pause rate hikes for a while as it monitors incoming economic data, some of which stems from the banking crisis that has prompted tighter lending.
This could see mortgage rates fall even further from their peak last fall, giving buyers some breathing room to take advantage of home prices that have fallen from their peaks.
But first, Congress must avert a crisis and adopt debt ceiling measures to avert an unprecedented default — an event experts say could wreck the US financial system.
A debt limit is looming on the real estate market
Speaker Kevin McCarthy (R-Calif.) and Minority Leader Mitch McConnell (R-Ky.) are seen speaking to reporters after meeting with President Biden, Minority Leader Hakeem Jeffries (DN.Y.) and Majority Leader Chuck Schumer (DN.Y.) to discuss the exposure limit on Tuesday, May 9, 2023 in the Oval Office of the White House in Washington, DC. (Greg Nash/The Hill).
A US debt default could have devastating consequences for homebuyers, as economists predict the already high cost of buying would rise by double digits.
In this unprecedented worst-case scenario, the market would practically freeze while mortgage rates soared and home sales plummeted.
According to a new analysis by real estate firm Zillow, the cost of buying a home could increase by 22 percent as mortgage rates rise above 8 percent in the event of default.
“Broadly speaking, it closely resembles the impact of what happened early last year when mortgage rates rose significantly from just over 3 percent — by several percentage points over a period of about half a year. This has taken a toll on the real estate market, going from price increases to price decreases,” Tucker said.
But Tucker said a drop in home sales was a bigger factor.
“Our projection for what would happen if this default occurred represents, by our estimate, 700,000 fewer home sales in the year and a half after this default,” Tucker said, adding that it means hundreds of thousands of people on both sides of the transaction are left out of the market are.
Still, the US has never failed to pay off its debt and housing affordability could be spared another blow.
What to expect from mortgage rates
The Fed’s rapid rate hikes over the past year have had a dramatic impact on mortgage rates, which hit historic lows early in the pandemic and sparked a buying boom.
The central bank’s monetary tightening via interest rate hikes impacted the mortgage market and pushed interest rates higher.
Higher mortgage rates combined with tight inventories and extremely high purchase prices made affordability difficult for many buyers, particularly younger buyers looking for their first home.
But once volatile interest rates stabilize after peaking at 7.08 percent late last fall, the policy rate will remain elevated. After falling for the third straight week, the average 30-year fixed-rate mortgage is just under 6.4 percent.
“This week’s fall continues the recent sideways trend in mortgage rates, which is a welcome break from last year’s record increases,” said Sam Khater, Freddie Mac’s chief economist.
“While inflation remains high, its growth rate has moderated and is expected to slow later in 2023. This should bode well for mortgage rates over the long term.”
Several economic forecasters are looking for the 30-year fixed rate to drop into the low 6 percent range towards the end of the year. Data from the Mortgage Bankers Association suggests interest rates could fall as low as 5.5 percent.
Will the Fed raise interest rates again?
Federal Reserve Chairman Jerome Powell speaks during a news conference in Washington Wednesday, May 3, 2023, following the Federal Open Market Committee meeting. (AP Photo/Carolyn Kaster)
Federal Reserve Chairman Jerome Powell said at the start of the central bank’s rate hike streak that the housing market needed to go through a correction to make homes more affordable.
House prices have cooled significantly over the past year along with inflation, and economists expect the Fed to hold off on further hikes.
Zonda chief economist Ali Wolf told The Hill it’s likely the Fed is done raising rates, at least for now.
“Fed officials have said they want to track how their 10 rate hikes so far are affecting the economy, especially since there is often a lag between higher interest rates and changes in economic growth,” Wolf said.
“However, if we see better-than-expected jobs numbers or inflation numbers, Fed officials may feel the need to raise rates again,” she added.
According to the Consumer Price Index (CPI) released this week, inflation slowed in April, reaching its lowest annual increase since 2021.
Zillow’s Tucker added that the Fed may take a pause from rate hikes while it continues to assess the impact of several regional bank failures.
“I think they probably want to take some time to watch the financial system digest the fallout from the recent bank closures and try to understand how the resulting credit channels are actually restricting lending a little bit,” he said.
Rents are likely to continue to fall
A silhouette of a pedestrian stands in front of a high-rise building at 160 Water Street in Manhattan’s Financial District while the building is being converted to residential housing, Tuesday, April 11, 2023 in New York. (AP Photo/Bebeto Matthews)
Asking rents fell for the 11th straight month in April, rising just 0.3 percent, data from real estate agent Redfin showed. At the same time, the average asking rents rose by more than 16 percent a year ago.
The slowdown in price growth is largely due to the high volumes coming into the market. Completions of buildings with five or more units rose a seasonally adjusted 60 percent year-on-year in March to 484,000. And this rapidly increasing activity has pushed the vacancy rate to 6.4 percent – the highest level in two years.
Redfin Deputy Chief Economist Taylor Marr told The Hill he expects the slowdown in rental price growth to continue, but without giving tenants much more financial flexibility.
“Rents are expected to move sideways in the second half of the year, avoiding large hikes but mostly not delivering much more savings for existing tenants,” Marr said in an email.
“Supply growth (e.g. new apartment building construction) is expected to slow by the end of the year and demand to remain stable – well below increases during the pandemic as many new rental households were established,” he added .
Another rental trend economists noted was the slowdown in rental growth, as measured by the CPI.
Jay Parsons, RealPage’s senior vice president and chief economist, wrote in an analysis following the release of the CPI that while rental growth numbers were down just 0.1 percent month-on-month, direction matters.
“This is a big deal for inflation and interest rate watchers (including home investors) because rent is the largest variable in the CPI’s largest category: housing,” Parsons wrote.
Housing, which accounts for around 40 percent of core inflation, rose 0.4 percent month-on-month in April, making the largest contributor to the overall monthly inflation rise.
What can you expect from real estate prices?
Property prices soared during the pandemic housing boom – with some markets posting double-digit gains. But price growth slowed in the second half of last year and into the spring buying season.
According to a current forecast, Moody’s Analytics expects prices for single-family homes to fall by 4 percent.
Biden appoints former House Democrat campaign manager Patrick Maloney as ambassador to the OECD. Biden names three key Fed candidates in the fight against inflation
Moody’s Analytics real estate economist Matt Walsh said there were signs the worst was yet to come. Still, he expects sales volumes to remain low compared to the pandemic as recent data points to a weaker home buying season.
However, he added that prices could fall from their peak even if sales volumes stabilize.
“While a 10% fall in house prices is significant, the correction ahead will be a far cry from the crash that followed the housing bubble of the 2000s,” he concluded.
Copyright 2023 Nextstar Media Inc. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.