Low mortgage rates should improve our situation. Housing statusIn theory, that might be true. But where mortgage rates are now, and where they are expected to be in the next year or so, isn’t enough to make that happen, according to Capital Economics.
Concern about a possible recession and Slow economic data Lower interest rates and lower home loan costs lead to expectations of lower interest rates and lower home loan costs. But lower interest rates alone will not revive the housing market. Housing market. Rates are 6.47%, which is high enough that people don’t want to list their homes for sale, and expensive enough to hold. potential home buyers On the margin.
“We are skeptical that the recent decline in mortgage rates will lead to a revival in the housing market,” said Thomas Ryan, an economist at Capital Economics. I wrote recently“Prices remain high compared to recent years, discouraging homeowners from moving, while most potential new buyers remain on the sidelines due to historically difficult affordability. We remain confident that the recovery in home sales will be muted.”
Throughout the pandemic, Mortgage Rates The housing market growth rate was around 3%, although it was volatile, going up and down at some points. This led to a housing boom. People could live wherever they wanted thanks to remote work, cheap money But when inflation rose and the Fed raised interest rates, mortgage rates followed. People stopped buying and selling homes, and the housing world froze. Last year, existing home sales fell to their lowest levels in nearly 30 years, and they remain low. But mortgage rates are now falling on the back of cooler economic data and some recession fears, falling to their lowest levels since 2008. Lowest level Last week, the recent drop in mortgage rates was enough to get everyone back into the market.
It’s not just mortgage rates. Home prices have skyrocketed during the pandemic, and inflation is only now starting to slow. Affordability has taken a hit overall because it costs much more to buy a home today than it did just four years ago.
But that doesn’t mean that lower mortgage rates aren’t welcome—they are. “Lower mortgage rates should breathe some life into the market,” Ryan wrote. Last year, when mortgage rates fell, homebuying orders surged, he said. But the surge didn’t last long because borrowing costs rose again and loan applications fell.
“We may get a bigger response from buyers and sellers this time around because interest rates are lower and it’s been a while,” he said. “But based on past modeling, it looks like borrowing costs will have to fall below 5% for us to see a full recovery in home buying.”
So Ryan’s magic mortgage rate is lower than the mortgage rate recently predicted by Compass co-founder and CEO John C. McKinsey, who said it would be below 6%. Not to mention that Capital Economics doesn’t expect that to happen anytime soon. By the end of the year, the research firm estimates that mortgage rates will be closer to 6.5%, and next year, it expects them to be around 6%. Either way, it seems we’re getting closer to the 6% mortgage rate reality that the chief economist at the National Association of Realtors recently warned about.
However, Ryan described the decline in mortgage rates as a “turning point for the housing market,” with it unlikely to return to 7% and existing home sales expected to improve slightly. But mortgage rates won’t return to their pandemic-era lows unless the entire economy collapses.
“Only a severe recession would prompt a return to the 3% mortgage rates that prevailed during the pandemic due to the housing frenzy, forcing the Fed to cut interest rates much more than is currently priced in by financial markets,” Ryan wrote.
“However, such a scenario would not support a strong recovery in home sales, as it would involve a sharp deterioration in labor market conditions with significant job losses. In fact, depending on the severity of the recession, this would lead to either a shallower recovery or perhaps a larger decline in sales. Nevertheless, we judge a soft landing to be the most likely outcome for the economy,” he added.
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