The Primary Lever for Easing Housing Affordability: Mortgage Rates Expected to Decrease, Says Morningstar

Morningstar Report: Falling Mortgage Rates Expected to Ease Housing Affordability

In a new housing report released by Morningstar, it is predicted that falling mortgage rates will be the primary lever to help ease housing affordability. The report highlights three levers that can contribute to this: falling mortgage rates, falling home prices, or rising incomes. However, due to financial market volatility, mortgage rates are considered to have the biggest impact in the short-term.

As of Friday, the average 30-year fixed mortgage rate tracked by Mortgage News Daily stands at 7.14%. Morningstar expects this rate to trend down in the second half of the year, with an average of 6.25% projected for 2023. The forecast model then predicts that mortgage rates will average 5.00% in 2024, followed by 4.00% in 2025.

Economists at Morningstar attribute the expected decrease in mortgage rates to the Federal Reserve’s efforts to combat high inflation. They anticipate that the Fed will aggressively cut the federal-funds rate in the coming years, driving it down from the current 5% to below 2% by 2025. Once inflation is under control, the focus will shift to jump-starting economic growth, which will require much lower interest rates, according to Morningstar.

Looking at the long-term, Morningstar expects mortgage rates to remain low. Factors such as an aging population and slowed productivity growth are cited as reasons for the downward pressure on long-term rates.

The report also highlights the potential impact of rising incomes and falling home prices on housing affordability. Morningstar’s economists project a “mild correction” in home prices, with new and existing home prices expected to decline by 6% and 4% respectively from 2022 to 2024. They note that a steeper decline in home prices may be prevented by the low inventory of existing homes for sale, which remains below pre-pandemic levels.

Morningstar’s mortgage rate and home price forecasts are considered to be on the low side compared to other forecasters. The Mortgage Bankers Association and Fannie Mae, for example, expect the average 30-year fixed mortgage rate to end 2023 at 4.9% and 5.6% respectively. Moody’s Analytics predicts mortgage rates to drift down to 6% by late 2024 and 5.5% by the end of 2025.

On the price front, Morningstar takes a bearish stance. Other firms like Zillow and CoreLogic anticipate national house prices to rise by 5.0% and 4.6% respectively over the next 12 months. Moody’s Analytics, however, expects a peak-to-trough decline of around 8% for national house prices.

It is important to note that mortgage rate and home price forecasts should be approached with caution due to the uncertainty in the economy, making it challenging to predict these factors accurately.

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Besides lower mortgage rates, what other factors can influence housing affordability in the short term

C growth through lower interest rates, including mortgage rates.

Lower mortgage rates are seen as a positive development for housing affordability, as they reduce the cost of borrowing for potential homebuyers. This can make homes more accessible and affordable, especially for first-time buyers or those with tight budgets. With lower monthly mortgage payments, individuals and families may be able to afford larger loan amounts or qualify for mortgages that were previously out of reach.

In addition to the impact on housing affordability, falling mortgage rates can also have a stimulating effect on the overall housing market. Lower rates can encourage more people to buy homes, leading to increased demand and potentially driving up home prices. However, Morningstar’s report suggests that the impact of falling mortgage rates on affordability will outweigh any potential price increases, resulting in improved access to housing for many.

While falling mortgage rates are expected to be the primary driver of increased affordability, Morningstar notes that other factors such as falling home prices or rising incomes can also play a role. However, these factors are not anticipated to have as significant an impact in the short term, making mortgage rates the key lever to watch.

It is important to note that the housing market can be influenced by a range of other factors beyond mortgage rates, such as supply and demand dynamics, economic conditions, and government policies. While falling mortgage rates can help ease affordability, it is also crucial to consider these broader factors when analyzing the housing market.

Overall, Morningstar’s report provides insights into the expected impact of falling mortgage rates on housing affordability. As rates continue to decrease, potential homebuyers may find it easier to enter the housing market, while existing homeowners may have opportunities to refinance and lower their monthly mortgage payments. These developments can contribute to a more accessible and affordable housing market in the years to come.