Drastic Shift in U.S. Home Prices Outlook as Fed Rate Cuts Appear Unlikely

In a significant revision, Freddie Mac has updated its expectations for U.S. home prices, indicating only a minimal increase of 0.5% in both 2024 and 2025. This updated forecast marks a sharp decrease from March’s prediction, which anticipated home price rises of 2.5% in 2024 and 2.1% in 2025. Earlier in the year, a more optimistic scenario was presented with a 2.8% increase projected for 2024.

Challenges for Prospective Homebuyers

Despite these lower projected price increases potentially benefiting buyers, challenges persist due to limited housing inventory and sustained high interest rates. Freddie Mac expressed in its April statement,

“While housing demand is solid due to a large share of Millennial first-time homebuyers looking to buy homes, they are challenged by high mortgage rates and a lack of homes available for sale. We expect these challenges to persist in 2024 mainly in the absence of significant rate cuts, which will keep the rate-lock effect in place and keep total home sales volume below five million in 2024.”

Economic Factors Influencing the U.S. Home Prices

A series of unexpectedly high inflation readings earlier this year has adjusted the outlook for Federal Reserve rate cuts, pushing U.S. bond yields and mortgage rates higher. Fed Chair Jerome Powell’s recent comments confirmed that interest rates would remain steady “for as long as needed” due to the strong labor market and ongoing inflation concerns.

This statement triggered a rise in Treasury yields, with the 10-year rate climbing above 4.6%, and the 30-year fixed-rate mortgage rate surpassing 7% for the first time this year.

Impact of Economic Conditions on Housing Predictions

These economic conditions over the past month have been the primary drivers behind Freddie Mac’s significant downgrade in its housing market outlook. Previous projections that suggested rate cuts could begin by summer and lead to lower mortgage rates later in the year have been withdrawn.

Freddie Mac now indicates a “wait and see” approach from the Fed, expecting mortgage rates to remain elevated for a longer period.

Continuing Challenges in the Housing Market

The ongoing high cost of home prices and mortgage rates continue to deter many Americans from homeownership, with Redfin recently declaring the cost of owning a home the highest on record. Redfin CEO Glenn Kelman remarked on the severity of the situation, especially for Millennials who have postponed starting families.