Inflation Pressures Are Easing but Rate Cut Forecast Remains Uncertain

The New Year is beginning where the old one ended -- with uncertainty about when – or whether – the Federal Reserve will begin cutting interest rates.

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Prospective homebuyers are confronting what the National Association of Realtors (NAR) describes as “the most difficult affordability conditions in nearly 40 years.”

Since the pandemic ended three years ago, home prices have increased by nearly 40 percent, while interest rates, now approaching 8 percent, have increased by nearly 170 percent.  As a result, the income required to qualify for a median-priced home has increased from $49,680 in 2020 to $107,000 according to the NAR; the percentage of income dedicated to home ownership is now 35 percent, well above the 28 percent considered ‘affordable’

In 2020, when rates were closed to 3 percent,  50 million households could obtain a standard mortgage loan of $400,000; today, only 22 million households would qualify, John Burns Real Estate, a California consulting firm, has calculated.

"The impact is exacerbated among first-time buyers who are more likely to be from underrepresented segments of the population,” Jessica Lautz, NAR's deputy chief economist and vice president of research, wrote in a recent report.

The trade association’s Housing Affordability Index, which has a long-term average of 138.1 (meaning a family earning the median income would exceed the qualifying income requirement by 38 percent) stands at 88.7 today.   

A “Worrisome” Development

“It’s a very worrisome development for America,” Lawrence Yun, the NAR’s chief economist, observed recently.

“The dynamics influencing the U.S. housing market appear to continuously work against everyday Americans, Rob Barber, CEO of ATTOM, observed in a recent report.   “With basic homeownership now soaking up more than a third of average pay,” he said, “the stage is set for some potential buyers to be priced out, which would reduce demand and the upward pressure on prices. We will see how this shakes out as the peak 2023 buying season winds down.”

The impact of the affordability squeeze is already reflected clearly in declining home sales, shrinking mortgage demand and in the sagging confidence of both home buyers and home sellers.

Existing home sales in September fell  to an annualized pace of 3.96 million units, more than 15 percent below the year-ago total and the slowest sales rate in nearly 13 years. 

Downward Trends

Pending sales – a forward looking indicator – suggest the downward trend is likely to continue.  The NAR’s pending sales index increased in September for the first time in 18 months, but the 1.1 percent increase was “inconsequential,” Yun, the NAR’s chief economist said, leaving pending sales at “historically low levels.”.

Mortgage demand, another predictor of future sales, fell to the lowest level since 1995, the Mortgage Bankers Association (MBA) reported.

New home sales, on the other hand, hit a rare positive note, rising more than 12 percent above the August total and surpassing the year-ago pace by almost 34 percent.  New home sales have been strong all year, providing the only alternative for determined buyers confronting a depleted inventory of existing homes.  But high rates are creating problems in the new home market, too.  More than 30 percent of builders responding to are cent survey said they have cut their prices and more than 60 percent said they have offered sales incentives to buyers.

Despite strong sales this year, builders are worried about buyer affordability constraints.  Builder confidence, measured by a monthly National Association of Home Builders (NAHB) index, declined in September for the third consecutive month, to the lowest level since January of this year.

“Builders and homeowners alike are taking stock of today’s market and deciding how to move forward,” Hannah Jones, a research analyst at, told DS News.

Builders are moving forward more slowly; permits for single-family home construction are running, concerned about buyer demand, are scaling back their construction plans; permits for single-family home construction more than 15 percent below the year-ago pace; the NAR is predicting that builders will start 10 percent fewer homes this year than in 2022.

No Confidence

Buyers and sellers, for their part, are far from upbeat.  Fannie Mae’s monthly Home Purchase Sentiment Index (HPSI), which has been declining steadily this year fell by another 2.4 points in September.  Only 16 percent of prospective buyers responding to the survey said it was a good time to buy a home, while 84 percent agreed that this is a bad time to enter the market, equaling the most pessimistic view recorded since the index was created in 2010.

Sellers had a more favorable view of market conditions, with 63 percent agreeing that this is a good time to sell, but that is down from 66 percent in August.  Both buyers and sellers cited elevated mortgage rates as their major concern. 

Concern that rates may increase above current levels has led more owners to list their homes, pushing inventory levels up slightly in September.  But the negligible (0.2 percent) gain left  listings 10 percent below the year ago level and 41 percent below the 2019 total.  And more than 24 percent of those listings received a price cut, according to a recent Zillow report.

Backing Out

Although real estate brokers are reporting that buyers in many markets are still looking actively for homes, they are also reporting an increase in the number of buyers who are backing out of purchase commitments.  Redfin reports that 15.7 percent of the deals struck in August fell through because buyers reconsidered the commitment they had made.

“I’ve seen more homebuyers cancel deals in the last six months than I’ve seen at any point during my 24 years of working in real estate. They’re getting cold feet,” a Redfin broker told DS News.  “Buyers get sticker shock when they see their high rate on paper alongside extra expenses for maintenance, repairs and closing costs. Many of them would rather back out, even if it means losing their earnest money. A lot of sellers are also willing to let buyers slip away because they don’t want to [agree to] repair requests.”

Looking ahead, some industry analysts are predicting that home sales will fall by almost 18 percent this year, reaching their lowest level since the subprime mortgage crisis triggered the “Great Recession” in 2008. “We’re in for a fairly prolonged freeze,” Chen Zao, an economist for Redfin, believes.   

Lower interest rates, which would improve that outlook, don’t seem likely in the near term.  The Federal Reserve’s Federal Open Market Committee  decided to ‘pause’ interest rate hikes again at its November meeting.  Although Fed Chairman Jerome Powell acknowledged some progress in the effort to control inflation, he also noted that “the process of getting inflation sustainably down to two percent has a long way to go.” And he left the door open to further rate increases, if conditions warrant.  “The committee will always do what it thinks is appropriate at the time,” he told reporters.