Is the housing market finally set for a rebound?
Russell Price, Chief Economist – Ameriprise Financial
Sept. 20, 2024
It’s been a bumpy path for the housing market this year, with sales constrained by tight availability and multi-decade-high mortgage rates. Borrowing costs also crept higher through May, weighing on results during the all-important spring selling season.
But a recovery may soon be on its way as the Federal Reserve cut interest rates at its September policy meeting. Will lower rates be the reinvigorating boost the U.S. housing market needs?
Here’s our housing market update:
Mortgage rate moderation expected to provide some relief
Through July, U.S. existing home sales are down about 3% versus levels a year ago, according to the National Association of Realtors. Median prices, meanwhile, are about 4% higher.1 In the new home market, the U.S. Census Department reports sales to also be about 3% lower with median prices flat to slightly lower.
We believe conditions should slowly improve in the months and quarters ahead as we forecast mortgage borrowing costs to see further moderation. Year-to-date, the cost of a 30-year fixed rate mortgage hit a high of 7.2% in early May. Interest rates more broadly, however, have been moderating in recent months on expectations that the Federal Reserve will begin its rate cutting cycle. At the time of this writing, the 30-year fixed mortgage rate stands at about 6.3%, according to the Mortgage Bankers’ Association.
Currently, we forecast the Fed to cut their overnight lending rate, the fed funds rate, by 0.75 percentage points this year with further cuts of about 0.25 per quarter thereafter. Mortgage rates are unlikely to adjust on a 1:1 basis, but by next summer we believe a 30-year fixed rate mortgage could cost between 5.75% and 6.25%.
A challenging landscape for first-time homebuyers
Housing market conditions of the last two years have made it difficult for younger generations to attain homeownership.
The Census Department recently said that 15% of young adults between the ages of 25 and 34 were living at home with their parents in 2022 (most recently available data), a level that has only been exceeded once in the last 40 years — during the heart of the pandemic in 2020. Prior to that, the high was 9% in 1960, according to the Census.
While conditions may delay homeownership for younger individuals, the added time at home could provide an opportunity to save for a down payment.
Homeowner equity growing fast
Homeowners’ equity in household real estate was 70.9% in Q1 2024, leaving it close to multi-decade highs, according to the Fed. This fast growth in home equity is due to a confluence of factors, including:
- Rising home valuations: Home valuations have risen significantly since the onset of the pandemic, leading to considerable equity gains for homeowners.
- The “stickiness” of the housing market: The higher mortgage rates of recent years have been a strong disincentive for those with lower rates to move, allowing many to steadily pay down their mortgage debt, thus slowly improving their overall financial profile.
- Low refinancing rates: The percentage of homeowners taking money out of their home via cash-out refinancing is close to record lows. For most, refinancing would mean trading into a mortgage rate that is likely at least double their initial rate.
NAR commission structure changes will likely have little impact
Under the surface, the residential property market has gone through a serious transformation in the way sales are transacted. As part of a lawsuit settled in March with the National Association of Realtors (NAR), a new commission structure for real estate agents went into effect in August.
Under the old process, the seller of the home would typically agree to pay a 6% commission to their selling agent, who would typically split it with the buyer’s agent. Now, the buyer’s agent must have their own written contract with the buyer specifying the fee (commission) they will be receiving. Since buyers are now expected to pay a commission to their agent, they now are more likely to negotiate them. Expectations are that commissions, particularly on the buyer’s side, will come down and be more in line with the level of service an agent provides.
While a big change to the way home sales are transacted, the impact on home prices is not expected to be significant. Given sellers of the home were previously expected to foot the commission bill, they would typically factor the commission amount (~6%) in when determining price of the home. Since sellers are now technically only paying commission to their selling agent, they theoretically could lower the price of their home accordingly. Instead, real estate agents will likely bear the brunt of the impact: A March analysis by TD Cowen Insights, estimates that real estate commissions could fall by as much as 25% to 50%.
Year-end outlook
We believe full-year sales should be about flat, with an approximate 5% increase in median selling prices.
Bottom line: The U.S. housing market has been on somewhat of a roller coaster over the last few decades, first with the housing bubble and subsequent crash of the mid-2000s, and more recently amid interest rate gyrations and a lack of existing home availability. Slowly, we believe market conditions are beginning to normalize. Mortgage borrowing costs and availability have been improving in recent months in a pattern we see as sustainable.
How do your home plans factor into your financial situation?
For many Americans, their homes are their most valuable asset and can be an effective tool to build wealth. If you or someone you know are planning to make a move or enter the housing market, talk to your Ameriprise financial advisor about assessing your options in light of current conditions and your financial goals.