Now that inflation has cooled, the Federal Reserve is expected to cut interest rates by at least 0.25 percentage points this week. That should be welcome news for Americans who need a loan: business owners, college students and anyone looking to buy a home.
Until March 2022, the United States enjoyed Historically low interest rates. This allows Americans to lock in a Average mortgage interest rates Just under 3 percent in 2021 — a record low. Today, mortgage interest rates are over 6 percent.
These high mortgage rates have made it difficult for many Americans to buy a home. This means that fewer homeowners are looking to sell and, as a result, buyers are competing for fewer homes and often face higher monthly mortgage payments.
Due to high mortgage rates and a tight housing market, Home sales are down From about 6.5 million in January 2022 to less than 3.8 million in December 2023. Those numbers have only recovered slightly in the months since then and remain below normal levels. Low inventory helped Average home prices drive June reached $426,900, their highest level.
Now, however, many buyers who have been waiting for interest rates to drop can start shopping for a home. But lower interest rates don’t necessarily lead to lower prices. In fact, some economists think that home prices — and even rental prices — may actually rise.
“There’s a lot of demand right now from first-time home buyers, so I wouldn’t be surprised if we don’t see a big change in prices after the rate cut because there are a lot of people waiting on the sidelines,” said Julia Fonseca, a finance professor at the University of Illinois at Urbana-Champaign.
Why can’t house prices come down soon?
In anticipation of lower interest rates, mortgage interest rates have already fallen from 8 percent. They could fall further if the Fed signals further rate cuts later this year, beyond what financial analysts expect.
This could lower Americans’ monthly mortgage payments. But housing costs are only affected by factors outside of interest rates. These are also based on availability, and lower interest rates will not immediately solve this problem. Buyers, especially first-time buyers — who often compete for a limited supply of starter homes in urban areas — will likely still find that homes are in short supply.
Part of that is because many homeowners who locked in lower rates didn’t want to pay those rates. According to a Recent paper By Jack Lieberson, an economics professor at the University of California, Irvine, and his co-author Jesse Rothstein at the University of California, Berkeley, higher interest rates mean that homeowners with mortgages are 16 percent less likely to move in 2022 and 2023 than in 2021. .
There seems to be some basis for this skepticism: Lu Liu, a finance professor at the University of Pennsylvania, and Fonseca found that homeowners 4 percent lock-in mortgage rate Save approximately $50,000 compared to what they would pay with a new mortgage of the same value at 7 percent.
With interest rates falling, it should be easier for homeowners to justify selling because they can get comparable mortgage rates on a new home. This can help increase inventory, but not enough or fast enough to meet what could be expected to be a large spike in demand from buyers.
Caitlin Gorback, a finance professor at the University of Texas at Austin, said that economic studies show that for every 1 percentage point drop in interest rates, home prices increase by an average of 5 to 10 percentage points. Given this, he said, “house prices are less likely to come down with rate cuts.”
What will be the rental price?
The forces at play in the housing market also have implications for renters Liu, Fonseca and their co-author Pierre Mabile of INSIDE advise Another recent paper That rents may rise if buyers close the market.
“There is some possibility that price pressures will also be felt in the rental market,” Liu said.
But there are some long-term factors that can reduce this stress. For one, high interest rates have slowed construction of multi-family housing considerably, Lieberson said. Lower interest rates should make it more affordable for developers to get a bank loan to construct apartment buildings.
“I’m really hoping that lower interest rates will lead to a surge in multifamily construction,” he said. “It won’t have an immediate impact on rents, but it will in the long run and it could be really important.”
Many apartment building owners have to get a new loan every 10 years to finance their property. If they can get new loans at lower interest rates, some may end up passing some of the savings on to tenants without raising their rents as much as they would otherwise.
Both of these factors may slow the move, but overall, “it means that if interest rates go down the path, renters will benefit,” Lieberson said.
