Amid a string of upbeat economic indicators, the housing sector stands as a glaring exception. A recent report from the Bureau of Economic Analysis highlights the issue. The report stated that escalating housing costs have resulted in core inflation surpassing the Federal Reserve's 2% annual target. A slump in homebuilding in Q3 also impeded overall economic growth.
The housing market's underperformance is particularly striking considering the relative strength of other economic sectors. The job market is solid, consumer spending is vigorous, and general inflation is receding. The key issue lies in the sky-high prices and steep mortgage rates that have made homeownership unaffordable for average income earners. According to the Federal Reserve Bank of Atlanta's housing affordability monitor, the median income household would have to allocate 42% of their income to a mortgage payment for a typically-priced new home, an increase from 29% in January 2020.
This housing affordability crisis has far-reaching negative impacts, straining family budgets and hindering the ability of people to relocate for job opportunities. The housing market became an unintended casualty in the Federal Reserve’s battle against inflation. When interest rates rise, the housing sector is most heavily impacted due to its sensitivity to these shifts. As the Fed raised rates rapidly in 2022 to curb inflation, mortgage rates skyrocketed. By October 2023, the average rate for a 30-year mortgage hit a 20-year high of 7.79%, a significant increase from the record low of 2.65% in January 2021, per Freddie Mac.
This situation has resulted in a nearly stagnant housing market. Homeowners who secured incredibly low rates during the pandemic are now reluctant to sell their homes and commit to new mortgages at higher rates. This "lock-in effect," along with other factors such as restrictive local zoning regulations and increased demand for larger homes due to telecommuting, has contributed to a housing market with fewer available homes and continually skyrocketing prices.
The Federal Reserve’s recent cut of the fed funds rate from its 20-year peak, however, could provide some relief. As inflation cools down, further rate cuts in the months ahead could lead to decreasing mortgage rates. Despite the housing market's challenging year in 2024, experts predict that 2025 could bring improvements. Nevertheless, the upcoming general election and the housing plans of the successful party could significantly alter this outlook. Both Vice President Kamala Harris and former President Donald Trump have pledged to tackle the housing shortage, with strategies that encompass building affordable homes and deporting immigrants to free up housing.