Current outlook is grim – but positive signs ahead, says top economist
Home prices may be tumbling across several major US markets – but the eyewatering increase that took place during the COVID-19 pandemic means affordability is still out of reach for many buyers, according to a new study.
First American Data & Analytics’ latest Real House Price Index showed 37 of the top 50 markets tracked had seen prices drop below their peaks, although recent declines failed to make a significant dent in the pandemic-era appreciation.
In Austin, Texas, for instance, nominal home prices have dipped by 7.8% since June 2022 – but they skyrocketed by 65% during the 27 months prior, meaning little has changed on the affordability outlook for many buyers.
San Francisco, meanwhile, saw prices spike by 31% between February 2020 and April 2022, meaning the subsequent 5.9% drop has provided scant relief for prospective buyers in that market.
There may be a sliver of good news in the likelihood of borrowing costs beginning to fall at some point this year, although any decrease will probably be mild, according to Odeta Kushi (pictured top), deputy chief economist at First American Financial.
“I think for this year, in this higher-for-longer environment that we find ourselves in, affordability will remain a challenge. I think generally speaking if rates come down by the end of the year, which is still my baseline expectation, we’ll get a little bit of a boost in affordability,” Kushi told Mortgage Professional America.
Mortgage rates rose for the first time in four weeks, according to Freddie Mac’s latest Primary Mortgage Market Survey.https://t.co/lC4LFmlAsF
— Mortgage Professional America Magazine (@MPAMagazineUS) May 31, 2024
Prospect of multiple Fed cuts becoming increasingly unlikely
While house price appreciation is also expected to cool slightly, with income growth to remain positive, mortgage rates likely won’t decline enough this year to substantially change the outlook for many would-be buyers.
“We should see some improvement in affordability by the end of the year but not meaningful changes… unless we see mortgage rates come down a lot more, which is not my baseline expectation,” Kushi said.
The beginning of 2024 saw markets ebullient at the possibility of multiple Federal Reserve rate cuts by the end of the year – but that prospect has faded rapidly amid stubborn inflation and a surprisingly resilient labor market.
Expectations have now diminished to a maximum of two Fed cuts by the end of the year, with any move to bring rates lower likely to be a careful and cautious one.
“If we expect one or maybe two rate cuts, that might put some downward pressure on mortgage rates, but I don’t think we’ll see meaningful shifts,” Kushi said.
Supply uptick points to improving affordability outlook
Many buyers may be facing a grim picture on housing affordability at present – but the longer-term outlook may be slightly sunnier.
Kushi described herself as “cautiously optimistic” on that front, with longstanding inventory shortages finally beginning to show signs of easing.
“We know that demand is robust. There are a lot of millennials on the sidelines that are waiting to jump into the market, but right now the payment to paycheck calculation is just not penciling out for them,” she said. “The market’s just not very affordable.
“But over a longer-term horizon, we’re already seeing supply increase. If we continue to see inventory increase and mortgage rates settle down a bit towards the new normal, and we have some certainty from the Fed about monetary policy, I’m more optimistic about affordability over a longer-term horizon.”
New listings have improved over a year ago – and while progress on bringing more supply to market has been steady rather than spectacular, things appear to be moving in the right direction, according to Kushi.
“We’re still undersupplied. There’s still a chronic housing shortage. We’ve been underbuilding for over a decade,” she said. “And so it’s going to take some time to make up those deficits.
“But there has been progress, which is very welcome to see because obviously you can’t have more activity in the housing market without more inventory. And so it’s good to see that. That should result in some more sales, but we’re still historically low.”
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