The US housing market has remained one of the most resistant when it comes to inflation rate. Other sectors like agriculture and manufacturing have witnessed improvement in the inflation ratio in the last couple of years but when it comes to housing, prices are still high while the availability is still low. The main problem is as simple as supply and demand where it is evident that the demand is inversely proportional to the supply. According to the statistics, there are many more people who are willing to purchase a home and with little availability for homes for sale. This difference has been aggravated by two factors; first, the pandemic led to an increased demand for homes, and second, mortgage rates have few back up from record low levels to the highest levels in a generation.
While this is the case, there is some reprieve, believing that the Federal reserve is likely to decrease the interest rates to better the housing market. But the question remains: will it be beneficial or rather be counterproductive?
The basic concept here is that when the central bank of the United States that is the Federal reserve lowers the rates on borrowing, the interest rates such as the rates on mortgages are also reduced. This may lead to increased homeowners selling their homes since the low interest rates will not appear like a trap for them. If more homes were to be offered for sale in the market the supply of homes will also be high and this we believe may lead to a low supply of homes. In theory it also would remove people from the rental market and thus reduce rent levels.
This kind of optimistic, though, is what some pundits like Daniel Alpert of Westwood Capital refer to as a ‘Goldilocks scenario’ – not too hot, not too cold, but just right. Still, slightly lower mortgage rate would ease the pressure on the market for both those seeking homes to buy and houses to rent.
However, there’s a catch. If the Federal reserve cuts rates too slowly or too gradually this may not be enough to entice homeowners to sell, particularly those who took mortgages below 3% at the start of the pandemic. What would remain, is the supply issue – that would constrain prices and prevent homeownership for people at large.
On the other hand, if the Federal Reserve moves aggressively and cuts fifty basis points or more it may well be a signal to the market that it is serious about the housing problem. Interest rates namely; mortgage whose latest rates average 6%. 2%, after which the decline could be even to below 6%. The chief economist at Redfin Daryl Fairweather has said that even bringing it down slightly to 5. 9% could be very psychological in the market and push more people to release their homes or acquire homes.
But here is a catch. Reduced interest rates may increase the demand as there will be a scramble of individuals tapping on cheaper financing. If the demand increases while the supply is still low, then it is very likely for the prices to go higher which will be even worse in the aspect of housing. According to Greg McBride from Bankrate the following pertains to thoughts on lower mortgage rates: “A further decline in mortgage rates might elicit a rush of interest that makes it more difficult to purchase a home. ”
Thus, even if some of the systems appear less tight at present, rate cuts admittedly, would not resolve the supply difficulty. If there are no new homes for buyers to construct or buy then the housing market could still be constricted and the affordability gap persistent.
For More Visit – Google
1 thought on “US Housing Market: Could Lower Mortgage Rates Worsen the Affordability Crisis?”