Federal Reserve officials plan to cut interest rates this year, real estate agents are likely to cut their commissions after a major deal and President Biden has begun looking at ways his administration can reduce high housing costs.
In short, there are many changes in the housing market. While sales have slowed significantly due to higher interest rates, both property prices and rents remain significantly higher than before the pandemic. The question now is whether recent developments will lead to a cooling of costs.
Economists who study the real estate market expect cost increases to be relatively moderate next year. However, they don’t expect prices to actually fall in most markets, especially when it comes to home purchases. Demographics continue to provide solid demand, and cheaper mortgages could lure buyers into a market that still has too few homes for sale, although lower interest rates could help attract more supply.
“It has become almost impossible for me to imagine real estate prices actually going down,” said Glenn Kelman, Redfin’s chief executive. “The inventory restrictions are so profound.”
Here’s what’s changing and what it could mean for buyers, sellers and renters.
Interest rates are expected to fall.
Mortgages have been expensive lately, in part because the Fed has raised interest rates to their highest levels in more than two decades. Although the central bank does not set mortgage rates, its policies contribute to making borrowing more expensive across the economy. Interest rates for 30-year mortgages are just under 7 percent, compared to under 3 percent most recently in 2021.
These interest rates could fall if the Fed cuts borrowing costs, especially if investors expect it to cut rates more than they currently expect.
Mortgage rates and some other borrowing costs tend to adjust when investors change their expectations of the Fed’s actions, rather than when the central bank actually takes action. That’s one reason mortgage rates have fallen from a peak of around 7.8 percent in late 2023: Inflation has eased, and it has become clear that the Fed could soon cut its key interest rate.
Central bankers predicted on Wednesday that they could make three interest rate cuts this year and three more next year.
Some analysts believe mortgage rates could fall further in 2024. Bankrate’s Greg McBride, for example, thinks they could end the year at around 6 percent.
Cheaper borrowing costs will have two major impacts on the real estate market. First, they make financing a purchase a little more affordable: The monthly payment for a $400,000 mortgage with a 7.8 percent interest rate is about $2,880, but with a 6 percent interest rate it’s closer to $2,400. Such a decline could spur demand from potential buyers.
Second, lower interest rates could encourage more homeowners to sell. Many Americans are sitting on cheap mortgages that they refinanced during the pandemic and are hesitant to give them up to move. As the gap between these existing mortgages and market mortgage rates narrows, this rate lock-in could disappear – potentially leading to more entry-level homes becoming available.
Brokerage practices are on the verge of change.
It’s not just borrowing costs that could impact the real estate market. The National Association of Realtors, a powerful group that has long set the guidelines for home sales, has agreed to settle a series of lawsuits that could upend the home buying process.
Pending court approval, the settlement would mean agents working with home sellers would no longer have to offer clearly announced compensation to buyer agents. The change is likely to reduce the industry standard commission of 5 to 6 percent.
It’s not clear exactly what that will mean for homeownership costs. There is speculation that this could drive down prices, partly because lower commissions could make it a little more attractive for sellers to list their homes for sale.
However, there are limits to how much prices can be reduced. Igor Popov, chief economist at Apartment List, said that while the decision could save Americans money on transaction costs, home sellers would likely continue to try to charge as much as possible in competitive markets.
“It’s a big deal for the industry, but I don’t think it’s a big deal for prices and volumes,” he said.
Agents aren’t sure what the consequences will be. Jovanni Ortiz, a Long Island real estate agent, said he has heard colleagues wondering whether agents would leave the business — but no one knows exactly how much it would cost agents and change home shopping.
“It’s too early to say,” Mr. Ortiz said.
The White House has guidelines in mind.
President Biden has focused on high housing costs in recent weeks, concerned that Americans’ difficulty paying rent or buying a home is weighing on the country’s economic optimism.
In his State of the Union address, he announced new ideas to help homebuyers. His latest budget request includes more than $250 billion in spending proposals to address high housing costs, including building or rehabilitating two million housing units and increasing rental assistance for low-income earners.
But most of these ideas are unlikely to have an immediate impact: There appears to be little chance of passing a major housing bill this year, with November elections looming and Republicans in control of the House.
Still, Mr. Biden has directed his administration to act unilaterally to reduce some costs associated with home purchases. He has advocated for eliminating title insurance fees on government-backed mortgages, potentially saving $1,000 or more per purchase. This week he called on real estate agents to pass on the savings from lower commission requirements to consumers.
The supply of rental apartments is increasing, but this could be short-lived.
If there’s a bright spot in housing affordability right now, it’s the rental market.
In recent months, the severe shortage of supply has eased, so that rents for new contracts have only risen moderately or even fallen in some markets.
A number of large rental buildings were constructed in some southern and mountain west cities, easing pressure on monthly prices. But there will be relatively little new inventory next year and in 2026, Mr. Popov said, so the slowdown may be limited.
The supply of homes for sale is a less sunny story. It’s not just that fewer sellers are putting houses on the market – housing construction has also been hit by higher interest rates. That has exacerbated a shortage that has been worsening for years and caused prices to remain high even as high mortgage rates have dampened sales of new and existing homes.
As builders see signs of a thaw in the market, they may be more willing to build new homes. However, this will be the case as many buyers will likely be attracted by slightly lower prices.
“Demand is so strong that the housing market is unlikely to collapse,” said Yelena Shulyatyeva, senior economist at BNP Paribas, noting that many millennials are still looking to buy, among other things.
The result? Mr Popov expects the property market could return to a little more normality in the coming months – prices are unlikely to fall, but increases could be slower and steadier compared to the big upturns since 2020.
“We have felt the aftereffects of the pandemic’s many strong impacts on the hose market,” he said. “We will return to more normal numbers and a more normal feeling in the housing market.”
Source link
2024-03-21 09:05:46
www.nytimes.com
