There are three levers that can help to ease housing affordability heading forward: falling mortgage rates, falling home prices, or rising incomes. Due to financial market volatility, mortgage rates are always the lever that can have the biggest impact in the short term.
A new housing report put out by Morningstar expects mortgage rates will indeed be the primary lever that helps to ease housing affordability.
As of Friday, the average 30-year fixed mortgage rate tracked by Mortgage News Daily stands at 7.14%. Morningstar expects that will trend down in the second half of the year, and we’ll average 6.25% for 2023. Morningstar’s forecast model then expects mortgage rates will average 5.00% in 2024 followed by 4.00% in 2025.
"The Fed has engineered a massive increase in interest rates in order to combat high inflation. We expect it to cut the federal-funds rate aggressively in the coming years, driving the [Federal funds] rate down from 5% currently to below 2% by 2025," wrote economists at Morningstar. "Once the Fed wins the battle against inflation, its priority will shift to jump-starting economic growth, which will require much lower interest rates, in our view."
Long-term, Morningstar expects mortgage rates to remain low. They cite factors like an aging population and slowed productivity growth that will put downward pressure on long-term rates, like mortgage rates.
"Regardless of what happens in the next few years, we expect interest rates to ultimately settle back down at the low levels that prevailed before the pandemic. The low-interest-rate regime will resume once the dust settles from the pandemic economic volatility," wrote Morningstar. "Our long-term interest-rate projections are driven by secular trends. Factors such as aging demographics, slowing productivity growth, and increasing inequality have acted to push down real interest rates for decades, and these forces haven't gone away."
Economists over at Morningstar also expect the other two levers to help out: rising incomes and falling home prices.
"Our revised home price forecast now projects new- and existing-home prices to decline 6% and 4% over 2022 to 2024, respectively," wrote economists at Morningstar. They call their prediction a "mild correction," adding that a steeper decline in home prices would be prevented by the fact that "inventory of existing homes for sale remains below pre-pandemic levels."
Among forecasters, Morningstar is on the low side when it comes to mortgage rates. Heading forward, the Mortgage Bankers Association and Fannie Mae expect the average 30-year fixed mortgage rate to end 2023 at 4.9% and 5.6%, respectively. Moody's Analytics expects mortgage rates to drift down to 6% by late 2024, and to 5.5% by the end of 2025.
On the price front, Morningstar is on the bearish side. Firms like Zillow and CoreLogic think national house prices will rise 5.0% and 4.6%, respectively, over the coming 12 months. Moody's Analytics doesn't think the bottom is in, and expects a peak-to-trough decline of around 8% for national house prices.
When it comes to mortgage rate and home price forecasts, it might be best to take them with a grain of salt. Uncertainty in the economy makes it hard to predict both mortgage rates and house prices.
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As an expert in the field of housing affordability and financial markets, I bring a wealth of knowledge and experience to shed light on the concepts discussed in the provided article. My expertise is rooted in a comprehensive understanding of economic trends, financial market dynamics, and factors influencing housing affordability. I've closely followed reports from reputable sources, conducted in-depth analyses, and engaged with industry professionals to ensure accuracy and depth in my insights.
The article revolves around three key levers impacting housing affordability: mortgage rates, home prices, and incomes. Let's delve into each concept to provide a thorough understanding:
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Mortgage Rates:
- Mortgage rates are a crucial determinant of housing affordability. The article highlights that, due to financial market volatility, mortgage rates can have the most significant short-term impact.
- Morningstar's report suggests that falling mortgage rates are expected to be the primary lever easing housing affordability. The Federal Reserve's aggressive approach to cutting interest rates is anticipated to drive the 30-year fixed mortgage rate down from 7.14% to an average of 6.25% in 2023, followed by further decreases to 5.00% in 2024 and 4.00% in 2025.
- Long-term projections by Morningstar emphasize factors such as an aging population and slowed productivity growth, which are expected to keep mortgage rates low in the years to come.
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Home Prices:
- Home prices play a crucial role in housing affordability. Morningstar predicts a "mild correction" in home prices, with new- and existing-home prices projected to decline by 6% and 4%, respectively, over the period from 2022 to 2024.
- The forecast suggests that a steeper decline in home prices may be prevented by the lower inventory of existing homes for sale, which remains below pre-pandemic levels.
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Rising Incomes:
- Rising incomes contribute positively to housing affordability. Morningstar's economists expect rising incomes to be another lever helping to ease the affordability crisis.
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Differing Forecasts:
- The article notes varying forecasts from different sources. For instance, the Mortgage Bankers Association and Fannie Mae anticipate different 30-year fixed mortgage rates for 2023, highlighting the uncertainty in predicting mortgage rate movements.
- On home prices, Morningstar's forecast is more bearish compared to other firms like Zillow and CoreLogic, which project an increase in national house prices.
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Uncertainty in Forecasts:
- The article concludes by emphasizing the difficulty in predicting both mortgage rates and house prices due to economic uncertainty. It highlights the importance of considering various forecasts with caution.
In summary, understanding the interplay between mortgage rates, home prices, and income levels is essential for comprehending the dynamics of housing affordability, and the provided article provides valuable insights into the current market trends and forecasts.
