Could Housing Market Become Affordable Again by 2025? New Report Makes Shocking Prediction
Written by
David Nadelle
Edited by
Nicholas Morine
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By the end of 2022, inflation levels had reached an all-time high, interest rates had grown considerably since the onset of the pandemic and the impact of the supply-chain crisis was still echoing throughout the market.
Given these unanticipated disruptions, the American real estate market faced a tumultuous and eventful year, but many forecasters are looking at 2023 for being the turnaround year for the housing market.
None more so than the economists at Morningstar, who predict that interest and mortgage rates will peak in 2023, paving the way for the housing market to revert to pre-pandemic trends.
As Fortune’s Lance Lambert detailed, a new Morningstar report expects housing affordability to calm as mortgage rates — then housing prices and household incomes — improve in the short term. Expectations are that 30-year mortgage rates will average 6.25% by the end of 2023, then hit 5% and 4% in 2024 and 2025, respectively.
In its effort to bring down the highest U.S. inflation in four decades, the Federal Reserve will likely need to increase rates a couple more times over the course of 2023 and is expected to deliver a rate hike at its next scheduled meeting at the end of this month. Its hikes thus far have not reduced property prices as significantly as expected.
Morningstar Expects Fed Easing
However, Morningstar believes the Fed will eventually ease its monetary policy, win the fight against inflation and, in turn, spark the U.S. economy and lead to lower interest rates.
“The Fed has engineered a massive increase in interest rates in order to combat high inflation. We expect it to cut the federal-funds rate aggressively in the coming years, driving the [Federal funds] rate down from 5% currently to below 2% by 2025,” Morningstar’s report indicated.
Despite 30-year mortgage rates rising to around 7% in November 2022 — the highest rates in over 20 years — Morningstar economists anticipate a gradual easing of mortgage rates beginning during the second half of 2023.
“Regardless of what happens in the next few years, we expect interest rates to ultimately settle back down at the low levels that prevailed before the pandemic. The low-interest-rate regime will resume once the dust settles from the pandemic economic volatility,” the reports stated, per Fortune.
While Morningstar forecasts new and existing home prices to drop from 6% to 4% by 2024, other market predictors are being less aggressive with their housing cost and mortgage rate projections. Zillow and CoreLogic analysts believe national house prices will rise by 5.0% and 4.6% over the next year, respectively.
As Fortune noted, Moody’s Analytics has 30-year fixed mortgage rates slowing down to 6.0% by the end of 2024 and to 5.5% in late 2025. Leading mortgage financing analysts at Fannie Mae and the Mortgages Bankers Association predict the 30-year rates will be 5.6% and 4.9% by the end of 2023.
However, the United States is facing a fundamental supply and demand problem. With not enough housing supply to meet the rising demand — and with dramatic increases in home costs, taxes, fees and municipal charges helping to price prospective homeowners out of contention — it’s no surprise that the U.S. has drifted from a seller’s market to a booming rental market.
That, coupled with a completely unpredictable economy, are making the prospect of owning a home less and less realistic for each generation of new entrants into the workforce. Observers may hope Morningstar is correct in its predictions and the underlying issues plaguing the U.S. real estate market are resolved in the short term.
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