Housing Poised for Growth, Although Affordability Remains as a Headwind
Source: Economics Group of Wells Fargo Bank, N.A.
Summary
Will Lower Mortgage Rates Unlock the Housing Sector?
The Spring Selling Season is getting underway with no shortage of green shoots. The Federal Reserve appears poised to begin lowering interest rates now that inflation mostly has subsided and a potential recession is falling out of view. As the FOMC eases monetary policy, mortgage rates could further decline off the highs experienced in late 2023. What’s more, 2024 opens with a considerable improvement in supply. Inventory is still low, yet new listings are outpacing last year and trending closer to the levels registered in 2022. On top of lower financing costs, more options for buyers could potentially help set the housing market’s gears in motion.
Although lower financing costs, rising supply and brightening economic growth prospects may help home sales turn-around from the sharp contraction experienced over the past two years, the recovery will likely be limited by adverse affordability conditions stemming from home price appreciation far outpacing income growth over the past several years. Structurally, demographics and a post-pandemic shift in housing preferences stand to keep underlying demand for single-family homes steady and outpacing supply. This dynamic, which is unlikely to change materially, ultimately stands to exert upward pressure on home prices and keep homeownership costs elevated. On the other hand, eroded affordability looks set to continue as a tailwind for the apartment market, although lower interest rates may cut into rental demand.