US home prices to rise modestly as Fed cuts rates

By Sarupya Ganguly

BENGALURU (Reuters) – U.S. home prices will rise relatively modestly this year and next, despite tight supply and expected interest rate cuts at the U.S. Federal Reserve, according to real estate analysts polled by Reuters, who said affordability it will improve but remain tense.

Forecasts for US home prices were little changed from the previous survey three months ago, despite more aggressive expectations in financial markets for interest rate cuts, suggesting that growth will be more moderate than in the recent past.

Average property prices in the world’s largest economy fell by only about 7% as the central bank raised interest rates by 525 basis points to the current range of 5.25%-5.50% and are still with over 50% higher than pre-pandemic levels.

Much of this price appreciation has to do with homeowners who have locked in low mortgage rates for 30 years — most below 5% and some even below 3% — and are unwilling to part with their homes with such cheap deals.

This, along with expectations that the Fed will begin cutting rates in September and by a total of 75 bps by the end of the year, will help support a market already constrained by a lack of adequate supply.

U.S. home prices based on the S&P CoreLogic Case-Shiller Composite Index of 20 metro areas are expected to rise an average of 5.4 percent in 2024, according to an Aug. 19-29 Reuters poll of nearly 30 real estate analysts .

It is expected to rise 3.3% next year and 3.4% in 2026, slightly faster than economists’ forecasts of average consumer price inflation of 2.3% and 2.2% for those periods.

“Housing starts and existing home sales are really weak. The only thing that’s been pretty healthy, and surprisingly, is that prices are still hitting record highs because of limited supply – a lot of people just don’t want to sell the houses,” he said. Sal Guatieri, senior economist at BMO Capital Markets.

“Over the next few months, the US housing market will continue to stabilize now that mortgage rates are beginning to fall in anticipation of Fed rate cuts…but if prices continue to rise, it will be hard to see a material improvement in affordability. .”

ACUTE CURRENT

The 30-year mortgage rate, which has averaged nearly 7 percent through 2023, fell last week to a 16-month low of 6.44 percent. It is forecast to average 6.7 percent in 2024, before falling to 6.0 percent next year and 5.9 percent in 2026, the survey medians showed.

That was partly why all 26 respondents to an additional survey question said affordability for first-time homebuyers would improve over the next year.

The story continues

However, an acute shortage of previously owned homes, with inventory levels still about 33% below pre-pandemic averages, according to a recent Zillow report, will likely keep affordability down.

According to the survey, sales of existing homes, which account for more than 90 percent of total sales, are expected to improve only slightly to an annual rate of 4.15 million units next quarter, considerably lower than the 6.6 million of units in early 2021. This was a downgrade from the previous survey.

This rate is expected to increase to just 4.24 and 4.40 million units in the next two quarters.

“Although lower interest rates will see housing demand improve over the next year, affordability will remain very tight for some time to come. By some metrics, it is already close to the worst levels in four decades,” he added Guatieri.

However, the interest rate cut is likely to reduce sticky rent inflation in the coming months, the polled analysts said.

Median urban rents are expected to lag home prices next year and rise 2-4%, slower than the current rate, according to the medians of a smaller sample of survey respondents.

(More stories from Reuters Global Housing Survey Q3)

(Reporting by Sarupya Ganguly; Reporting by Shaloo Shrivastava and Pranoy Krishna; Editing by Ross Finley and David Holmes)