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By Sarupya Ganguly

BENGALURU (Reuters) - U.S. home prices will rise relatively modestly this year and next despite tight supply and expected U.S. Federal Reserve interest rate cuts, according to housing analysts polled by Reuters who said purchasing affordability will improve but would remain strained.

Forecasts for U.S. house prices have barely changed since the previous survey three months ago, despite more aggressive expectations in financial markets for interest rate cuts, suggesting this upswing will be more subdued than in the recent past.

Average property prices in the world's largest economy fell only about 7% since the central bank raised rates by 525 basis points to the current 5.25%-5.50% range, and are still more than 50% higher than pre-pandemic levels.

Much of that price appreciation has to do with homeowners who have locked in low 30-year mortgage rates - most under 5% and some even below 3% - and who are unwilling to part ways with their homes on such cheap deals.

That, coupled with expectations the Fed will start cutting rates in September and by a total of 75 bps by year-end, will help underpin 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 metropolitan areas are expected to rise a median 5.4% in 2024, according to an Aug. 19-29 Reuters poll of nearly 30 property analysts.

They are expected to climb 3.3% next year and 3.4% in 2026, slightly faster than economists' average consumer price inflation forecasts of 2.3% and 2.2% for those periods.

"Housing starts and existing home sales are really weak. The only thing that's been fairly healthy, and surprisingly so, are prices still hitting record highs because of limited supply - a lot of people just don't want to sell their homes," said Sal Guatieri, senior economist at BMO Capital Markets.

"For the next few months, the U.S. housing market will continue to stabilize now mortgage rates are starting to decline in anticipation of Fed rate cuts ... but if prices continue to rise, it's going to be tough to see a material improvement in affordability."

ACUTE SHORTAGE

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

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

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

According to the poll, existing home sales, comprising more than 90% of total sales, are expected to improve only slightly to a 4.15 million unit annualized rate next quarter, considerably lower than 6.6 million units in early 2021. That was a downgrade from the previous survey.

That rate is expected to pick up to only 4.24 and 4.40 million units in the following two quarters.

"Although lower interest rates will cause an improvement in housing demand over the next year, affordability will remain very strained for quite some time. By some metrics, it's already close to its worst levels in four decades," Guatieri added.

Relief from lower interest rates will, however, likely dampen sticky rental inflation in coming months, analysts in the survey said.

Average urban home rents are expected to lag home prices over the coming year and rise by 2-4%, slower than the current rate, according to medians from a smaller sample of poll respondents.

(Other stories from the Q3 global Reuters housing poll)