Would-be homebuyers who have been dreaming of Federal Reserve rate cuts might need to dial down their hopes.
The good news is that US mortgage rates have been falling this month , and remain well below peaks levels from late last year.
But financial markets are now assigning just a coin-flip probability to a Fed cut in June, and 75bp for the year, according to CME data . US interest rates are now expected to fall much more slowly than they were two months ago .
In other words, a persistent and sharp decline in long-dated rates — which would be needed to drive mortgage rates quickly lower — is unlikely unless the Fed keeps rates too high for too long and creates a recession. (And in that case, many households will have bigger problems than home affordability.)
As we’ve covered before , high current mortgage rates + homeowners locked into 30yr rates below 1 per cent = very few homeowners who want to sell today. That’s pushed costs up and affordability down, as Bank of America shows in this handy chart from a note today:
This chart makes it pretty clear that last year was a bad one for homebuyers.
Even the inventory of new homes dipped a bit in 2023, as high mortgage rates put a damper on Americans’ desire to finance anything. From BofA:
The bright spot is that the trend appears to have reversed. And the National Association of Home Builders reported today that homebuilder confidence made a surprise rebound this month.
From BofA:
Mortgage rates have eased — now hovering just around 7% — and we expect the first Fed cut . . . in June. While mortgage rates remain elevated, even incremental declines can help support activity on the margin through improved affordability. Affordability may also improve if our expectation for more supply hitting the market is realized, helping to promote a healthier pace of activity, and limiting any rise home prices.
In fact, we may be seeing some signs of this improvement already. Existing home sales posted a 3.1% m/m increase to 4.0mn saar in January, the highest level since August. New home sales also picked up to 661k saar in January, the highest level since October.
And in an unusual development, new home prices are declining a bit while existing home prices keep rising:
Quelle surprise : Having a 1 3 -per-cent interest rate locked in for 30 years is a powerful reason to hang on to your house. So powerful, in fact, that further declines in new mortgage rates probably won’t change the trend, the bank says:
Looking ahead, should mortgage rates continue to fall further, we expect more inventory in existing homes, but it may not be enough to forestall further increases in existing home prices.
This is one reason we still think the situation bodes well for single family starts. Single family permits, which have held up over the past year, provide some support for this view. This should support residential investment going forward: recall that the single-family sector is a bigger driver of GDP growth than multi-family. Affordability is likely to improve as the Fed cuts rates beginning in June, and we should see a more stable and healthier housing market.
In other words, it could be a good time for Americans to start researching homebuilders and contractors in their area.
Another bright spot? Because single-family homebuilding gives a bigger boost to GDP growth than multi-family development, Millennials are finally doing their part to stimulate the economy.
Further reading: — Millennials and boomers are competing for homes. Guess who’s winning? — The uneasy US housing stalemate