Housing Market Stalemate: What Buyers and Sellers Need to Know
Homebuyers and sellers have reached a stalemate. According to Forbes, mortgage rates have reached their lowest level in almost fifteen months. This puts them below 6.5% for the first time in 2024. With this decline in rates, sellers might expect to see more activity in the market. However, buyers remain reluctant and sales are sluggish. Timing might play a factor. As school has started for most places across the country, potential homebuyers may already be committed to their locations.
While seasonal issues come into play when examining the housing market, news of potential federal rate cuts could also be prompting buyers to hold onto their cards and see how things play out. According to the New York Times, cooled inflation rates in July have kept the Federal Reserve on track for an imminent interest rate cut.
With interest rates at a historic twenty-four-year high, this will bring relief to multiple markets, including housing. This could provide a “tailwind” effect to a market that has caused frustration for both buyers and sellers since the start of the 2020 pandemic, leaving sellers stuck with houses they cannot move and buyers unable to find their next homes.
Another factor was the “lock-in” effect, in which potential sellers were locked into a pre-pandemic interest rate of 5% and unable to afford the move to a higher rate. PBS reported that home sales hit a 30-year low in 2023, marking the lowest year for home sales since 1995. With so many potential sales placed on hold, movement in the market could signal a shift in trends.
Lower interest rates will have a far-reaching effect that goes beyond the individual buyer or seller. The state of real estate investing could be in for a tectonic shift. If housing sales do indeed rise, this could signal a move into a “bull market” or a “tailwind” effect. With the lock-in effect of high interest rates, housing prices refused to budge despite slow sales. Even with 2023 being a record low in sales, house prices reached a record high in June, as reported by CNBC. With lower interest rates on the horizon, the market might see these houses start to move, even at these prices.
The question to follow is if the lock-in effect is removed and the housing market becomes more dynamic, whether or not these houses will maintain their inflated prices. The intuitive logic for sales is that more sales means more competition among buyers, which would be good for sellers. However, lack of housing availability has largely been the source behind the rise in house pricing. If locked-in sellers begin to move, wider-spread availability could prompt a “feeding frenzy” in the housing market.
Many have speculated on a possible collapse in the housing market, comparing the current state of housing and retail to the bubble seen in 2006. However, as reported by Forbes, housing supply could still prove to be lower than demand. Even with new home construction reaching its highest inventory since early 2008, more is still needed to fill the inventory gap. Only should the supply of existing houses and new houses increase will the market see some much-needed relief. Until housing availability outpaces demand, high home prices should remain the new normal, with a crash being unlikely.
Lowered interest rates will have more far-reaching effects than with single-family households. A shift to working from home, another side-effect of the pandemic, triggered a drop in demand for office real estate at between 30-50%. Lowered interest rates are unlikely to counteract the lessened demand for office spaces. This can pose detrimental effects on the real estate markets of cities and urban development.
The Impact of Interest Rates on the Housing Market: A New Era?
As the housing market remains stagnant, potential sellers and buyers should keep their eyes out for impending interest rate cuts. The possibility of moving sluggish sales could change how housing needs are addressed in the coming years. Potential investors should remain aware of how a more dynamic market will affect different real estate sectors. While predictions for a crash remain low, the prospect of a change in the winds is looking more likely.
