Will lower mortgage rates help the housing market?

To help you understand what’s happening in the housing market and what we expect to happen in the future, our highly experienced Kiplinger Letter team will keep you abreast of the latest developments and forecasts (Get a free issue of The Kiplinger Letter or subscribe). You’ll get all the latest news first by subscribing, but we will publish many (but not all) of the forecasts a few days afterward online. Here’s the latest…

If you’re thinking of buying or selling a home over the next year or so, or if you’re in construction or real estate, or are considering renting vs. buying you may be interested in the trends in the real estate sector.

Here’s what to expect in the housing market as mortgage rates slowly come down and more owners start thinking about putting up a for-sale sign. It’ll take time for mortgage rates to decline to the point where a lot of sidelined buyers get back into the market. Rates are well off their peak from 2023 — when 30-year fixed loans averaged 7.8% — to about 6.3% recently. While that gives home buyers some financial breathing room, it’s likely not enough to spur a major uptick in demand. We expect rates to slowly decline, to just below 6% by the end of 2025. As that happens, demand will perk up next year.

Supply remains historically very tight, especially when it comes to existing homes. Their sales fell to an annual pace of 3.86 million in August, close to their lowest point in recent years. Homeowners who are sitting on mortgage rates that are below 5% are just reluctant to give those up and borrow at 6% today, the biggest factor keeping sales slow. Weak sales point to further slowing of prices. It’s still a seller’s market, but houses are taking a bit longer to sell.

The share of sellers cutting prices is up to about 20% of active listings, according to Redfin. Prices aren’t being slashed by dramatic amounts. But more sellers are realizing they’re asking a bit too much. We look for home prices to rise nationally by 3% in 2024. 4% in 2025. Not bad if you’re a seller, but well off the pace logged during the pandemic frenzy. As recently as this summer, home prices nationwide were rising at a 5% clip.

With so little existing inventory, home builders will continue to be busy, as buyers who would normally buy used turn to the new market instead. Builders will continue to have to offer subsidized mortgage rates or other financial breaks, but those that do will have plenty of business. Construction slowed this summer. It’ll pick up next year as lower rates lift demand faster than listings of existing homes. By contrast, multifamily construction is likely to continue its decline, which started in late 2022. A glut of new construction that began a few years ago is hitting the market now, keeping rents relatively flat. Now, builders are focusing on completing existing projects instead of breaking new ground.

The increase in apartment vacancies will peak at 6% late this year and then tail off, while demand picks up. That will give landlords some leverage to raise rents more next year. Overall, 2025 will be a year of slow normalization. Gradually easing rates should help to thaw the nearly frozen housing market, without overheating it — a bit of relief for Realtors, loan officers and the many other jobs tied to home sales.

This forecast first appeared in The Kiplinger Letter, which has been running since 1923 and is a collection of concise weekly forecasts on business and economic trends, as well as what to expect from Washington, to help you understand what’s coming up to make the most of your investments and your money. Subscribe to The Kiplinger Letter.

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