Real estate pessimism looms as inflation hits housing market
The American housing market is facing a new challenge as higher inflation persists, causing house prices and mortgage rates to rise once again. This is a blow to hopes that financing costs would decrease this year, adding to the list of economic issues that could impact the upcoming presidential election campaign.
Economists are now reducing their bets that the Federal Reserve will cut rates following the latest Consumer Price Index report. Goldman Sachs, Bank of America, and Deutsche Bank have all adjusted their predictions, arguing that persistent inflation will force the Federal Reserve to maintain higher borrowing costs for a longer period.
This could mean that the Federal Reserve’s prime interest rates may remain at or near 5.5%, the highest level in decades, during the spring and summer home-buying season. Lawrence Yun, an economist at the National Association of Realtors, expressed concerns about the impact of March’s inflation numbers on interest rates.
The housing market volatility reflects the paradoxical nature of the American economy, which is growing faster than many other countries. However, voters are increasingly focused on inflation as they express disapproval of President Biden’s management of the economy.
President Biden has proposed measures to address the affordability problem, including $10,000 tax credits for first-time buyers and for homeowners selling their “starter homes.” Additionally, a landmark legal settlement may soon lead to the elimination of the 6% commission charged by real estate agents, one of the highest in the world.
Despite these efforts, housing prices continue to rise due to a shortage of new homes and increased demand for larger properties that accommodate remote work. The median price of a new home has climbed to $485,000 from $357,000 in 2021.
Mortgage rates are also on the rise, with the average 30-year rate reaching about 6.9 percent this week, according to Freddie Mac. Although slightly below previous highs, this marks a significant increase over the past two years, in line with the Federal Reserve’s efforts to combat inflation.
Market watchers are closely monitoring the yield on the 10-year Treasury bond, which has spiked in recent weeks. As Wall Street anticipates that the Federal Reserve will maintain elevated rates, mortgage rates and other consumer loan rates are expected to follow suit.