Rate-weary homebuyers in wait mode for Fed's next move
Nearly three-quarters of aspiring homeowners are waiting for the Federal Reserve to cut rates before buying a home, a report revealed.
High interest rates are a significant barrier for many Americans looking to buy homes, with 71% of prospective buyers waiting for rates to drop before entering the market – up from 64% from a year ago – according to the BMO Real Financial Progress Index.
Additionally, about one-third of these hopeful homeowners are considering using funds from their 401(k) retirement plans to help cover home purchase costs.
When will rates fall?
The Federal Reserve's aggressive interest rate hikes over the past two years, intended to curb inflation, have spilled over into the housing market.
Michael Gregory, deputy chief economist at BMO, doesn't foresee rate cuts offering significant relief to buyers this summer.
"In light of persistent strength in the US economy, as well as stubborn underlying inflation, the market has been pushing its expectation for Fed rate cuts into the autumn," Gregory said in the report. "Looking ahead to 2025, we expect the Fed to stick to a gradual rate cut pattern."
Despite the unfavorable climate, BMO's survey underscores that homeownership remains a central aspiration. 67% of Americans consider it a key life goal—an ideal that resonates strongly with Millennials and Gen Z (73% for both demographics). However, an overwhelming 73% of aspiring homeowners believe the goal of owning a home is currently out of reach.
Sacrificing retirement savings
About 30% of potential homebuyers admit they intend to use their 401(k) retirement savings to help finance their purchase. This risky strategy is most prevalent among younger generations, with 31% of Millennials and 34% of Gen Z respondents expressing this intent, compared to 25% of Gen X and only 16% of Baby Boomers.
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"It's clear that Americans are feeling the strain of elevated rates, and many are uncertain about how to go about navigating the ever-evolving housing market," said Thomas Parrish, head of US retail lending at BMO. "It's critical, especially during periods of high rates, for customers to engage a mortgage advisor who can guide potential buyers and sellers through the homebuying journey, determine suitable budgets, and dispel common misconceptions about the pathways to homeownership – even if it currently feels out of reach."
The survey also found that housing costs are on par with credit card debt as barriers to financial progress, with 30% citing each as an impediment. Additionally, 81% say their overall financial situation causes financial anxiety. While 74% set financial goals, only 32% have a written financial plan, and 40% set a yearly household budget.
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