Will lower rates revive the housing market?

Summary

Mortage rates move modestly lower

Elevated mortgage rates continue to exert significant pressure on the housing market. Over the past several months, existing home sales have essentially moved sideways, preserving the lackluster trend that began in 2023. In addition to financing costs, prohibitive home prices and scarce supply remain discouraging to interested buyers.

Encouragingly, recent progress has been made on the affordability front. Mortgage rates have dropped by 45 bps since mid-July, most recently hitting 6.3% in the first week of October. The drop looks owed to September FOMC's 25 bps fed funds rate cut solidifying expectations for additional reductions. A more moderate trend in home price appreciation is also allowing for a marginal improvement in affordability conditions. Since February, home prices have declined on a month-to-month sequential basis, a sign that increased supply and soft demand is applying downward pressure on prices.

So will lower interest rates inject more energy into the residential sector? A lower fed funds rate should strengthen the macroeconomic backdrop and add support to housing demand. In our view, however, mortgage rates are likely to remain within a range of 6.2%-6.4% over the next few years as fiscal pressures and higher inflation expectations prevent a material decline in long-term rates. Although affordability conditions may improve around the margins, high mortgage rates and elevated home prices will likely continue to limit activity and prevent a full-fledged recovery.

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