Housing Market Needs Two Major Changes to Help Americans

The housing market needs mortgage rates to fall much further from their current levels to give Americans a chance to afford homes that at the moment are beyond their reach as prices continue to be elevated and inventory remains limited, Mark Zandi, chief economist at Moody's Analytics, told Newsweek.

Mortgate rates hit their highest levels since the turn of the century in October. While rates have declined over the last few weeks, buying a home remains a challenge for millions of Americans.

"The market is still struggling and I don't think it can come back to life unless the affordability improves," Zandi said. "That requires either that mortgage rates fall further, house prices decline, incomes increase more quickly, or some combination of all those things."

Zandi said that he expects mortgage rate to continue to decline over the next year from their current 6.61 percent, something that will be key to kick-start more activity in the housing market.

"It does feel like when mortgage rates get below 6 percent, that the market starts to thaw, so there's some life coming back into the market," he said. "That feels like at least something on the threshold of like 32 degrees Fahrenheit. It doesn't mean that It was going to be off and running but, you know, at least it's starting to thaw out."

One key challenge is that the existing homes market continues to remain frozen as sellers who are enjoying typical mortgage rates of 3.5 percent are reluctant to relinquish the low rates if they have to pay 6.6 percent on a new loan. And buyers are still reluctant to buy at these rates, Zandi said.

"Even if mortgage rates are down a bit, they're gonna have to cut the price to get to actually sell them because again, at these prices, at these interest rates with these incomes, housing is not affordable," he said.

Home prices have continued to rise even as mortgage rates have declined, data shows. The median sale price jumped by 4.5 percent for the week ending December 24, according to Redfin, compared to a year ago, to about $364,000, the biggest increase since October 2022.

Zandi said at some point homeowners might be forced to sell, compelled by personal circumstances, that could lead to a decline in prices over the next two years.

"I feel much more confident that mortgage rates are going to come down than I feel about house prices declining," he said. "If I am wrong, it's that house prices stay higher for longer than I am anticipating."

On Thursday, Freddie Mac revealed that mortgage rates continued to trend down, with the 30-year fixed rate averaging 6.61 percent as of December 28.

"The rapid descent of mortgage rates over the last two months stabilized a bit this week, but rates continue to trend down," Sam Khater, Freddie Mac's chief economist, said in a statement.

As 2023 comes to an end, the housing market is primed to recover, Khater said.

"Heading into the new year, the economy remains on firm ground with solid growth, a tight labor market, decelerating inflation, and a nascent rebound in the housing market," he added.

Zandi was also cautiously optimistic, though he said it may take awhile before homes can become affordable for Americans again.

"I think the housing market is past its bottom and will slowly come back to life in 2024," he said. "But I don't think even by the end of the year, we'll feel like housing is back. It's going to take two to three years, maybe even longer, before affordability is to a place where the housing market is normal."