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WHAT WILL THE ANTICIPATED DROP IN U.S. MORTGAGE RATES MEAN FOR REAL ESTATE MARKETS?
An intensely awaited development for the U.S. housing market this year is a long-anticipated fall in interest rates. While inflation has dropped over the past year, this progress has been slow, and officials within the Federal Reserve, the country’s central bank, have kept interest rates at 5.25% to 5.5%—a 23-year high—since July 2023.
Where the Federal Reserve leads, mortgage rates follow. The average 30-year rate reached a peak of 7.79% in October 2023, the highest level in 20 years, according to national mortgage lender Freddie Mac. As a result, property sales have been on a steady decline over the past three years, based on U.S. Census data. The difficulty in securing a property during this higher-rate cycle even led U.S. President Joe Biden to comment on the issue in his State of the Union address in March 2024.
He proposed a US$10,000 tax incentive designed to encourage first-time buyers and those wanting to sell their starter homes. “I want to provide an annual tax credit that will give Americans US$400 a month for the next two years as mortgage rates come down to put toward their mortgage, when they buy a first home or trade up for a little more space,” he said.
With another presidential election taking place in November 2024, concerns that the Federal Reserve’s decision on rates might be further delayed were dismissed by its chairperson Jerome Powell, who said the bank’s policymakers will “do what we think is the right thing, when we think it is the right thing.”
Industry experts expect borrowers to get a bit of breathing room by 2025, however. The Mortgage Bankers Association estimates that rates will fall to about 5.9% by 2025, while Wells Fargo has made a similar forecast of 6%. In mid-June 2024, the Federal Reserve projected that it would only make one cut to interest rates this year, with Powell saying the “restrictive” policy “is having the effect we would hope for” in stabilizing the economy.
“I believe we can say with some certainty that U.S. mortgage rates will be lower at the end of the year,” says Anthony Chan, former chief economist, JPMorgan Chase. He anticipates that the rate at the end of 2024 will be around 6.4% and will fall to 5.9% in 2025.
“As buyers see lower rates, they will be less worried about the ‘lock-in effect’—the hesitancy of selling their house if it means taking out a higher-rate mortgage for their next home,” adds Chan. “This will ultimately support housing activity if the economy avoids a slowdown.” Fears of a downturn have dropped significantly, with JPMorgan Chase reversing its prediction in 2024. At a speech at the Economic Club of New York at the end of April 2024, the bank’s Chief Executive Officer Jamie Dimon said the economy was “booming,” adding that “the American consumer—even if we go into recession—is much wealthier than before.”
Source: Sotheby's International Realty. |
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