News of imminent rate cuts from the Federal Reserve has added another unexpected twist to the housing market outlook.
Based on the recent forecast released by Freddie Mac on Tuesday, home prices are expected to rise 2.1% in 2024 and 0.6% in 2025. This marks a significant change, particularly for this year.
Previous Forecasts Versus Current Predictions
In April, Freddie Mac predicted that home prices would only increase by 0.5% in both 2024 and 2025, a substantial drop from its forecast in March. At that time, they had anticipated price increases of 2.5% in 2024 and 2.1% in 2025.
Interestingly, Freddie Mac refrained from offering new home-price guidance between April and now, choosing a quarterly rhythm instead. This decision seems wise given the recent tumultuous shifts in markets and economic data.
The Impact of Inflation and Federal Rates
In the spring, higher-than-expected inflation readings made the prospect of Federal rate cuts seem less likely, causing bond yields and mortgage rates to rise. However, the tables turned in the summer when the latest inflation rate reached a three-year low. This low rate makes a cut next month appear more likely. Federal Chair Jerome Powell essentially confirmed this, stating that “the time has come” to cut.
Mortgages rates have decreased significantly in recent weeks, nearing the 6% benchmark. Some experts believe reaching this number will trigger more relaxation in the housing market.
Anticipating Changes in Demand and Inventory
Freddie Mac predicts a significant increase in demand, primarily from first-time homebuyers. However, other aspects of their outlook are more varied. They foresee a significant revision upwards for 2024 home prices, but a more cautious view of 2025.
They state, “We also expect lower rates to loosen the rate lock-in effect to some extent, providing some boost to inventory—although it should be minimal, given the bulk of existing homeowners have locked-in rates below 6%.” Despite some relaxation, they anticipate that the tight inventory, which results from a decade of under-construction properties and is exacerbated by the rate lock-in effect, will continue to restrict home sales.
Expectations for the Future
The result should be a modest increase in home sales for the rest of the year and into 2025, remaining below an annual rate of 6 million.
Despite these challenges, Freddie Mac remains positive overall and doesn’t foresee an economic recession. They note, “While prospective homebuyers continue to face affordability challenges due to high home prices, homeowners are experiencing significant wealth gains which makes them less vulnerable to adverse economic events.”
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