Fed hikes and default fears: Here’s what could be next for the housing market

Homebuyers and renters alike can feel relief later this year as home prices stabilize, mortgage rates drop and rental price growth continues to slow.

Economists expect the Federal Reserve to hold off on raising interest rates for a while while it monitors incoming economic data, some of which is from the banking crisis that has led to a tightening of lending.

This could allow mortgage rates to fall further from their highs last fall and give buyers a little breathing space to take advantage of home prices that are coming down from their highs.

But first, Congress must avert a crisis and work on the debt ceiling to avoid an unprecedented default – an event that could shatter the US financial system, according to experts.

The debt limit looms over the housing market

House Speaker Kevin McCarthy (R-Calif.) and Minority Leader Mitch McConnell (R-Ky.) speak to reporters following a meeting with President Biden, Minority Leader Hakeem Jeffries (DNY) and Majority Leader Chuck Schumer (DNY) to discuss the discount limit in the Oval Office of the White House In Washington, D.C. on Tuesday, May 9, 2023 (Greg Nash/The Hill).

A US debt default could be devastating for homebuyers as economists predict that already high purchase costs will rise by double digits.

In this unprecedented worst-case scenario, the market would effectively freeze as mortgage rates rise and home sales fall.

Home buying costs can rise 22 percent as mortgage rates exceed 8 percent in the event of a debt default, according to new analysis from real estate company Zillow.

“Overall, it looks a lot like the impact of what happened early last year, when mortgage rates rose dramatically from just over 3 percent — up several points in a period of about half a year. That dragged the market Housing derailed, turning it from price growth to declining prices.”

But Tucker said lower home sales will be a bigger factor.

“In our prediction of what will happen in this default represents, according to our estimates, 700,000 fewer home sales in the year and a half after this default,” Tucker said, adding that this puts hundreds of thousands of people on both sides of the deal left out of the market.

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However, the United States has never defaulted on its debt, and housing affordability may be spared another hit.

What do you expect for mortgage rates

The Fed’s rapid rate hikes over the past year have weighed heavily on mortgage rates, which reached historic lows early in the pandemic and fueled a buying boom.

Monetary tightening from the central bank by raising interest rates penetrated into the mortgage market and pushed interest rates higher.

High mortgage rates combined with tight inventory and high purchase prices have hampered affordability for many buyers, especially younger buyers looking for their first home.

However, once volatile rates stabilize after hitting a high of 7.08 percent late last fall, the record rate remains high. After falling for the third week in a row, the average 30-year fixed rate mortgage is hovering just below 6.4 percent.

“This week’s decline continues the recent sideways trend in mortgage rates, and is a welcome departure from last year’s record increases,” said Sam Khater, chief economist at Freddie Mac.

“While inflation remains high, its growth rate has been moderate and is expected to slow over the remainder of 2023. This should bode well for the long-term trajectory of mortgage rates.”

Several economic projections show the 30-year fixed interest rate falling to a low 6 percent range at the end of the year. Data from the Mortgage Bankers Association projects could drop as low as 5.5 percent.

Will there be more Fed rate hikes?

Federal Reserve Chairman Jerome Powell speaks during a press conference in Washington, Wednesday, May 3, 2023, following the Federal Open Market Committee meeting.  (AP Photo/Caroline Custer)
Federal Reserve Chairman Jerome Powell speaks during a press conference in Washington, Wednesday, May 3, 2023, following the Federal Open Market Committee meeting. (AP Photo/Caroline Custer)

Federal Reserve Chairman Jerome Powell said early in a series of central bank rate hikes that the housing market needed to make a correction to make homes more affordable.

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Home prices have cooled dramatically over the past year along with inflation, and economists expect the Fed to hold off any further increases.

Zonda chief economist Ali Wolf told The Hill that the Fed is likely done raising interest rates, at least for now.

“Federal Reserve officials have reported that they want to track how the 10 increases so far have affected the economy, especially since there is often a gap between higher rates and changes in economic growth,” Wolf said.

She added, “If we see stronger-than-expected employment statistics or inflation numbers, Fed officials may feel the need to raise interest rates again.”

Inflation subsided in April, marking the lowest annual rate increase since 2021, according to the Consumer Price Index (CPI) released this week.

Zillow’s Tucker added that the Fed may take a break from the rally while it continues to assess the fallout from several regional bank failures.

“I think they probably want to take some time to watch the financial system digest the effects of the recent bank closures and try to understand how the credit channels that come out of that are starting to constrain credit a little bit,” he said.

Rents are on their way to continuing to fall

Silhouette of a pedestrian in front of a high-rise at 160 Water Street in Manhattan's Financial District, as the building is undergoing conversion into apartments, Tuesday, April 11, 2023, in New York.  (AP Photo/Bebeto Matthews)
Silhouette of a pedestrian in front of a high-rise at 160 Water Street in Manhattan’s Financial District, as the building is undergoing conversion into apartments, Tuesday, April 11, 2023, in New York. (AP Photo/Bebeto Matthews)

Rental demand slowed 11y Data from real estate brokerage Redfin showed a rise of just 0.3 percent in April, respectively. At the same time last year, average rents required were up more than 16 percent.

The slowdown in price growth is largely due to the large number of units coming to market. Completed buildings of five or more units jumped 60 percent year-over-year in March to 484,000 on a non-seasonally adjusted basis. This fast-growing business has pushed the vacancy rate to 6.4 percent – the highest level in two years.

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Redfin deputy chief economist Taylor Marr told The Hill that he expects price growth in rents to continue to slow, but without financial maneuvering room for renters.

“Rents are expected to move sideways in the second half of the year, to avoid large increases, but for the most part not to provide much savings for existing tenants,” Marr said in an email.

He added, “It is expected that increases in supply (eg, new multi-family construction) will slow by the end of the year and demand will remain steady – much less than the sudden increases during the pandemic as many new rental homes were formed.”

Other economists in the rent trend pointed to the decline in rent growth as measured by the consumer price index.

RealPage Vice President and Chief Economist Jay Parsons wrote in RealPage.com analysis After the release of the CPI, although the rental growth figures were only 0.1 percent lower than the previous month, it was the trend that mattered.

“This is a big deal for inflation and rate watchers (condo investors included) because rent is the largest variable in the largest CPI category: shelter,” Parsons wrote.

Shelter, which makes up about 40 percent of core inflation, rose 0.4 percent month-over-month in April and was the largest contributor to the overall monthly increase in inflation.

What’s in store for housing prices?

Home prices have grown rapidly during the pandemic housing boom – with double-digit gains seen in some markets. But price growth slowed over the back half of last year and into the spring buying season.

Moody’s Analytics expects single-family home prices to fall 4 percent, according to Modern forecast.

Matt Walsh, economist at Moody’s Analytics, said there are signs the worst may be in the rear sight. However, he expects sales volumes to remain low compared to the pandemic, with recent data pointing to a weak home buying season.

But he added that prices could fall from their highs even as sales volumes stabilize.

“While a 10% drop in home prices is important, the coming correction will be a far cry from the crash that followed the housing bubble of the 2000s,” he concluded.

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