Federal Reserve officials are planning to reduce interest rates this year, real estate agents are expected to decrease their commissions following a major settlement, and President Biden is exploring ways to address high housing costs within his administration.
Significant changes are underway in the housing market. While sales have slowed due to higher interest rates, both home prices and rents remain significantly elevated compared to pre-pandemic levels. The question now is whether these recent developments will help lower costs.
Housing market economists anticipate relatively moderate cost increases in the next year. However, prices are not expected to decrease in most markets, particularly for home purchases. Demographic trends continue to drive strong demand, and lower mortgage rates could attract buyers to a market with limited housing inventory, even though reduced rates may encourage more supply.
Glenn Kelman, CEO of Redfin, stated, “It has become nearly impossible for me to envision home prices decreasing. The inventory constraints are profound.”
Here’s what’s changing and what it could mean for buyers, sellers, and renters.
Interest rates are expected to decrease.
Mortgage rates have been high recently, partly due to the Federal Reserve raising interest rates to a level not seen in over two decades. While the Fed doesn’t directly set mortgage rates, its policy decisions impact borrowing costs across the economy. Rates for 30-year mortgages have been hovering just below 7 percent, up from under 3 percent in 2021.
If the Fed lowers borrowing costs, mortgage rates could decrease, especially if investors anticipate more significant rate cuts than currently expected.
Mortgage rates and other borrowing costs typically adjust based on investors’ expectations of the Fed’s actions rather than the actual movements of the central bank. This is one reason why mortgage rates have been gradually declining from a peak of around 7.8 percent in late 2023. With easing inflation and the potential for a Fed policy rate reduction, mortgage rates may continue to fall.
Federal Reserve projections suggest three rate cuts this year and three more next year.
Some analysts predict further decreases in mortgage rates in 2024. Greg McBride from Bankrate believes rates could end the year around 6 percent.
Lower borrowing costs will have two significant impacts on the housing market. Firstly, it will make financing a purchase slightly less expensive, potentially increasing demand from prospective buyers. Secondly, lower rates could encourage more homeowners to sell, as the gap between existing mortgages and market rates narrows, making it more attractive to list homes for sale.
In addition to borrowing costs, broker practices are expected to change. The National Association of Realtors has reached a settlement that could alter home buying practices by removing the requirement for agents working with sellers to clearly advertise compensation to buyers’ agents. This change may lower the industry standard commission of 5 to 6 percent.
The potential impact on home prices remains unclear. Speculation suggests that lower commissions could make it more appealing for sellers to list their homes, possibly reducing prices.
However, there are limitations to how much prices may decrease. Igor Popov, chief economist at Apartment List, believes that while the settlement could save Americans money on transaction costs, sellers may still aim to charge as much as possible in competitive markets.
Real estate agents are uncertain about the aftermath. Jovanni Ortiz, a Realtor on Long Island, mentioned that colleagues are questioning the potential impact on agents leaving the business, but the exact consequences remain unclear.
President Biden has been focused on addressing high housing costs, with new proposals introduced to assist home buyers. While immediate effects may be limited due to political challenges, the administration is taking steps to reduce costs associated with home buying, such as eliminating title insurance fees for federally backed mortgages.
Housing supply is increasing in rentals, but that could be short-lived.
One positive development for housing affordability is the rental market, where a recent easing of supply constraints has led to moderate or even decreasing rents in some areas. While new rental buildings have alleviated some pressure, limited new inventory in the coming years may restrict this cooling trend.
On the other hand, the supply of homes for sale presents a more challenging situation. Fewer sellers entering the market, combined with decreased home construction due to higher interest rates, have exacerbated an ongoing shortage, keeping prices elevated despite reduced sales activity.
As builders observe signs of a market recovery, they may increase construction, coinciding with potential buyer interest stimulated by lower rates.
Yelena Shulyatyeva, senior economist at BNP Paribas, anticipates a return to a more normal housing market in the near future. Prices are unlikely to drop, but the rate of increase may stabilize compared to the significant fluctuations seen since 2020.
