Lower rates will only improve housing affordability for 3-6 months, experts say
Americans waiting for lower mortgage rates to improve housing affordability will be sorely disappointed as bidding wars push prices higher over the long term.
In an interview with Fox Business, Telsey Advisory Group executive Joe Feldman said mortgage rates would make homes more affordable over a three- to six-month period.
But after that, lower rates will “manifest themselves into price growth and offset the decrease in mortgage payments,” said Feldman.
The irony is that lower mortgage rates could actually make housing less affordable by allowing buyers to qualify for bigger loans.
“They can actually pay more for a home than they otherwise would,” said Realtor.com senior economist Ralph McLaughlin, who was also present during the interview.
When buyers go to bid on a house, “they can bid up to price more than when mortgage rates were higher,” he explained.
Feldman agreed, saying lower rates will only increase demand in the long run, “resulting in upward pressure on home prices and impacting affordability.”
Feldman’s warning is echoed by Vishal Garg, the CEO of online mortgage lender Better.com. He recently told CNN that declining interest rates have always triggered a massive increase in housing demand.
There’s no reason to wait
As CBS explained, many housing experts recommend that homebuyers “date the rate and marry the home.”
This concept explains that interest rates will decline in the future, so buyers shouldn’t get hung up on paying more at the start of their mortgage term. Their desired home, on the other hand, won’t be listed forever.
Research by Kelly Shue, a professor of finance at Yale’s School of Management, supports this idea.
“Our research shows that many people make the mistake of waiting to take out a mortgage or other long-term loan if the Fed is expected to lower interest rates in the future,” Shue wrote.
“[T]here is actually no reason to wait,” Shue explained, adding that “the current long-term interest rate already reflects the average of expected short-term interest rates over the life of the long-term loan.”
Shue’s warning about waiting is already playing out in the market. Mortgage rates have declined sharply over the past four months, but home prices continue to climb.
JPMorgan economists expect average home prices to continue rising in 2025 as lower rates spur additional buying demand.
Making matters worse, a lack of housing supply, especially in the more desirable resale market, will continue to stoke the affordability crisis facing average buyers.
These conditions have already contributed to the worst housing affordability crisis since the peak of the last housing bubble in 2006.
As analyst Charlie Bilello recently explained, the typical U.S. household would need to spend 43.8% of their income to afford an average home in today’s market.
Whatever cost savings they accrue from lower mortgage rates will likely be offset by rising prices, larger mortgages, or both.
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