The U.S. housing and mortgage market has faced several challenges recently, primarily due to the impact of rising mortgage interest rates. Freddie Mac provides an in-depth analysis of the current state of the market and future projections, highlighting key trends and figures that homebuyers, homeowners and investors need to know.
Freddie Mac's latest mortgage rate forecast
Current state of the housing market
The housing market is struggling and has been heavily impacted by rising mortgage rates. As of May, total home sales (including existing and new homes) reached 4.7 million, down 2.3% from April and down 4.9% year-over-year. Notably, sales of both existing and new homes declined in May, breaking from recent trends in which new home sales have often offset declines in existing home sales.
Key Stats:
Existing home sales: 4.11 million units (seasonally adjusted annualized rate) in May, down 0.7% from the previous month and down 2.8% from a year ago. New home sales: The annualized rate for May was 619,000 units, down 11.3% from April, making up about 13% of total sales.
Inventories of both existing and new homes have shown modest improvements compared to May, but are still below pre-pandemic levels.
Existing home inventory increased 19% year over year to 1.28 million units. New home inventory is at its highest level since January 2008.
This slowdown in sales momentum is compounded by the ongoing challenges faced by homebuyers, particularly those grappling with the issue of homebuying in an environment where rising prices and mortgage rates continue to put pressure on budgets.
Construction company trust and construction trends
The National Association of Home Builders' Housing Market Index reported that homebuilder confidence declined, falling to 43 in June from 45 in May. This reading is below the neutral benchmark of 50 and indicates a less optimistic outlook for construction conditions over the next six months due, among other things:
Rising mortgage interest rates Rising construction costs
The decline in homebuilder confidence reflects the current sentiment of homebuilders who see market pressures affecting their future plans.
Construction Data Summary Month Total Housing Starts Single-Family Housing Starts Multifamily Housing Starts April โ โ โ May Down 5.5% Down 5.2% Down 10.3%
Despite the decline in housing starts, the number of units under construction in the multifamily sector remains significantly higher, with 898,000 units underway. This backlog indicates that while new construction may be slowing, there is still robust activity in the market that could alleviate some of the inventory shortage over time.
Trends in house prices and mortgage rates
A look at home prices shows that the FHFA Purchase-Only Home Price Index showed a slight increase in April.
0.2% increase from previous month, 6.3% increase from last year.
That home prices have continued to rise despite a decline in home sales highlights a key dilemma for would-be buyers. Thirty-year fixed-rate mortgages averaged 6.92% in June and ended the month at 6.86%. Mortgage activity has increased, especially when mortgage rates have fallen below 7%, the Mortgage Bankers Association noted.
Increase in refinance activity: Up 25.9% month-over-month in the last week of June. Purchase applications: Up 8.0% month-over-month by the end of June.
The increase in mortgage applications suggests that potential buyers and homeowners looking to refinance are seizing the opportunity to secure more favorable interest rates while they are still available.
Housing Market Forecast
Freddie Mac expects the U.S. economy to continue to be impacted by rising interest rates, leading to slower growth and a weaker labor market through 2024 and 2025. Inflation data has stabilized and appears to be on a reassuring trajectory, but the outlook remains cautious.
Potential interest rate cuts: If the job market softens enough to keep up with inflation, interest rate cuts could come later this year. This moment could provide some relief for mortgage rates in 2024. Mortgage rate forecast: Interest rates could fall below 6.5% by 2025, making homeownership more affordable and stimulating the housing market.
Future Origination Forecast
Freddie Mac forecasts that homebuying volume is expected to grow modestly over the next few years, buoyed by rising home prices, but homebuying difficulties are expected to limit improvement significantly above 2023 levels.
Purchase Originations: Freddie Mac expects purchase origination volume may increase slightly in 2024, but will remain constrained by affordability issues as rising home prices remain a barrier for many potential buyers. Refinance Originations: Expected to be flat in 2024, but with mortgage rates dropping below 6.5% in 2025, refinance volume may increase as homeowners take advantage of lower interest rates. What this means for homebuyers and investors
Freddie Mac's forecast paints a mixed picture for homebuyers and investors. Lower interest rates may open up new opportunities for many, but the economic climate remains fraught with challenges. Here's what to consider:
First-time homebuyers: Those entering the market may find some reprieve as interest rates may decline over the next few years, but rising home prices may continue to pose a challenge to homebuying. Existing homeowners: Many homeowners who have taken out mortgages at higher interest rates could benefit greatly from refinancing options as interest rates fall. Those considering refinancing should thoroughly evaluate their options. Investors: Rising inventory and potential interest rate reductions could bring a unique opportunity to the market. However, investors should proceed with caution, keeping a close eye on economic indicators and homebuying difficulty trends.
Conclusion
In summary, Freddie Mac's latest mortgage forecast highlights a cautious but encouraging outlook for the U.S. housing market. While current conditions pose obstacles for buyers, the potential for lower mortgage rates in the future may be a silver lining.
Whether buying, selling or refinancing, it is important for all market participants to stay informed about and adapt to changing economic conditions so they can weather challenges and make the most of opportunities as they arise.
This forecast presents both challenges and opportunities, making it imperative that potential buyers and investors stay informed of changing housing market conditions. The influence of macroeconomic factors and housing supply trends will continue to shape the future of homeownership in America.
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