The housing market performance in the past four years has been stifled with high inflation, high mortgage rates, and the home seller lock-in effect resulting in low inventory. All of these parameters have resulted in the reduction in housing affordability for homebuyers. Mortgage rates remained at a level above 6%, disincentivizing homeowners to list their home for sale as the majority of homeowners have mortgage rates locked in under 6%. The lack of supply continues to drive up home prices as homebuyer demand results in multiple offer situations to compete in a low inventory environment. Homebuyer sentiment has been at record lows over the last 4 years bottoming out in 2022 but has seen a small uptick in October with a drop in mortgage rates. However, the increase in the mortgage rate in November is expected to curb this small uptick in homebuyer sentiment.
In May 2024, FreddieMac reported 30-year mortgage rates at 7.22%. Mortgage rates steadily decreased into September to 6.08%. The trajectory resulted in homebuyer optimism as rates were on the path to breaking that critical 6% threshold that was responsible for the home seller lock-in effect. However, mortgage rates ticked upward into November to 6.81%. Many homebuyers have been rejected for more than a year due to the lack of affordability and increasing home prices. This continuation of high mortgage rates reduces homebuyer sentiment.
The Economic and Strategic Research (ESR) Group had forecasted mortgage rates dropping below 6% in early 2025., but “the revised forecast now shows mortgage rates ending 2025 at 6.3% and remaining above 6% through 2026.” 1
Elections have consequences and, despite this adjusted forecast by ESR showing mortgage rates higher than originally expected, the market expects stronger economic growth in a second Trump Administration. Inflation has kept housing affordability suppressed the last 4 years, but “ESR Group expects core inflation to return to the Fed’s 2% target by the second quarter of 2026…”1 Mortgage rates projected to remain above 6% will further solidify homeowner lock-in effect and keep home prices high. However, stronger economic growth is expected to improve the labor market outlook.
Affordability is the main constraint in the existing housing market leading to depressed homebuyer sentiment. It’s a battle between the lock-in effect and the stronger economic growth outlook. However, the stronger economic growth outlook leaves the door open to improved conditions if overall policies lead to increase in revenues, increase in wages, and reduction of non-essential costs. Homebuyer sentiment is currently weakened but will return to optimism with the second Trump Administration. The Trump Administration policies are expected to bring back the American Dream, making homeownership affordable again with a return to prosperity.
1 https://www.fanniemae.com/newsroom/fannie-mae-news/recent-rate-run-expected-keep-existing-home-sales-near-historic-lows-through-2025
December 1, 2024
By Sophia Georges
Copyright 2024 - Realsophy Real Estate, Sophia Georges
