Potential homeowners are facing trouble when trying to purchase a home due to high mortgage rates. According to Freddie Mac data, mortgage rates were 6.89% on July 11, 2024, causing affordability issues for many Americans trying to purchase a house. Despite the high mortgage rates, house prices continue to rise, with an increase in 97 of the top 100 largest metropolitan areas from Q1 2023 to Q1 2024 (FHFA).
At the beginning of 2024, many hoped that mortgage rates would fall to the 5%-6% range. However, consistent inflation and a strong job market prevented the Federal Reserve from lowering interest rates. Consequently, the spring season resulted in few home purchases. While many homeowners remained locked into their low-rate contracts, potential buyers did not want to accept the high rates and house prices.
June’s increase in unemployment indicates a slowing labor market, while lower-than-anticipated inflation has reinforced the Federal Reserve’s confidence in achieving its inflation targets. Even though a rate cut in July is unlikely, maintaining higher borrowing costs, market expectations hint at a possible reduction in September. As a result, mortgage rates, which indirectly follow the federal funds rate, are likely to stay high throughout the summer.
An important question is whether a decrease in the federal funds rate will be significant enough to revive the housing market. 76% of homeowners have a mortgage rate under 5%; hence a slight reduction in rates will not be incentive enough for them to sell their homes.
Property taxes are another factor that disincentives movement. In some states, such as California, the property’s fair market value on the purchase date is used to assess its value. Unless the property is sold or reconstructed, the value can only increase up to 2% per year. Selling or buying a home at the current high price would lead to higher property taxes, which would further restrict mobility.
While lower rates could attract certain buyers back to the market, significant improvement in affordability is unlikely. High prices will remain a deterrent, and more buyer competition due to lower rates will only worsen the problem. Moreover, the expected decrease in mortgage rates is expected to be modest. Despite signs of inflation lowering, it may remain above the Fed’s target for a prolonged period, constraining potential rate reductions.
The future of the housing market remains unclear. Affordability most likely won’t improve from a modest decrease in mortgage rates. With lower rates potentially sparking increased buyer competition, there could be added pressure on prices. Although inventory is gradually growing, many homeowners benefiting from low-rate mortgage contracts might hesitate to sell. Some home buyers could reenter the market with the Fed potentially cutting rates in September. Nonetheless, any decrease is expected to be moderate, suggesting rates could remain elevated in the meantime.
