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This Coming Change Could Unlock the U.S. Housing Market
Key Takeaways
The Federal Reserve could be one key to unlocking the gridlock in the housing market.
A new study released Tuesday by real estate marketplace Refin found that six out of seven homeowners with mortgages have an interest rate below 6%. That means a majority of homeowners are paying less interest than the average mortgage rate currently offered, which hovers around 6.5%.
This disparity has discouraged homeowners from selling their homes, providing fewer options for buyers and in turn, driving up prices. This phenomenon has locked up the housing market, but it may end soon.
How Did We Get Here?
During the pandemic, the Federal Reserve dropped its fed funds rate to near zero in an effort to stimulate the economy and avoid a recession. Mortgage interest rates are heavily influenced by the fed funds rate.
Because of the shift in monetary policy, mortgage rates fell to record lows under 3% in 2021, according to Freddie Mac. At that time, many homeowners bought houses or refinanced their mortgages.
As the pandemic's economic effects pushed home prices up, the Fed lifted its fed funds rate to a 23-year high. And just as mortgage rates rose when the central bank cut rates, the opposite happened when the Fed worked to fight inflation. New listings were at their lowest level in a year last month as a result, Redfin found.
“I have a dozen or so homeowners who would like to sell but aren’t willing to give up their 3% interest rate for one that’s more than twice as high,” said Blakely Minton, a Redfin real estate agent in Philadelphia, in a press release.
A shortage of homes on the market has pushed prices up, making houses unaffordable for potential buyers who also have to contend with high interest rates.
This Won’t Last Forever
There is some movement in this trend. According to Redfin, the number of homeowners with a mortgage rate below 6% has decreased from above 90% at the start of the year.
This trend is likely to continue as the Federal Reserve prepares to
cut its fed funds rate
for the first time in more than a year at its next meeting.
Mortgage rates are already starting to decline. According to Freddie Mac's calculations, the average 30-year fixed rate fell to 6.46%, the lowest in 15 months.
“Although mortgage rates have stayed relatively flat over the past couple of weeks, softer incoming economic data suggest rates will gently slope downward through the end of the year,” said Sam Khater, Freddie Mac’s Chief Economist, last week.
Read the original article on Investopedia .