What comes next for the housing market?

Federal Reserve officials plan to cut interest rates this year, real estate agents are likely to cut their commissions after a major settlement and President Biden has begun looking for ways his administration can ease high housing costs.

In short, a lot is changing in the housing market. Although sales have slowed significantly due to higher interest rates, both home prices and rents remain sharply higher than before the pandemic. The question now is whether recent developments will reduce costs.

Economists who study the housing market expect cost increases to be relatively moderate in the coming year. But they don’t expect prices to actually fall in most markets, especially home purchases. Demographic trends are still driving solid demand, and cheaper mortgages could lure buyers into a market where there are still too few homes for sale, even as lower interest rates could help attract more supply on the edges.

“It has become almost impossible for me to imagine that home prices will actually fall,” said Glenn Kelman, Redfin’s CEO. “The limitations on inventory are so profound.”

Here’s what’s changing and what it could mean for buyers, sellers and renters.

Interest rates are expected to fall.

Mortgages have been pricey lately, partly because the Fed has raised interest rates to the highest level in more than two decades. The central bank does not set mortgage rates, but its policy measures trickle down to make borrowing more expensive across the economy. Rates up Mortgages with a term of 30 years fluctuate just below 7 percent, compared to less than 3 percent in 2021.

Those interest rates could fall if the Fed lowers borrowing costs, especially if investors come to expect rates to be cut even more than they currently expect.

Mortgage rates and some other borrowing costs tend to adjust when investors change their expectations about what the Fed will do, rather than when the central bank actually takes action. That’s one reason why mortgage rates have fallen from a peak of around 7.8 percent at the end of 2023: inflation has eased and it has become clear that the Fed could soon cut its policy rate.

Central bankers predicted on Wednesday that they could make three interest rate cuts this year and three more next year.

Some analysts think mortgage rates could fall further in 2024. Bankrate’s Greg McBride, for example, thinks they could end the year around 6 percent.

Cheaper borrowing costs will have two major effects on the housing market. First, they make it a little cheaper to finance a purchase: The monthly payment for a $400,000 mortgage with a 7.8 percent interest rate is about $2,880, but is more like $2,400 with a 6 percent interest rate. Such a decline could boost demand from potential buyers.

Second, lower rates could encourage more homeowners to sell. Many Americans are sitting on cheap mortgages they refinanced during the pandemic and are hesitant to give them up to move. The smaller the gap between existing mortgages and the mortgage interest rate on the market becomes, the more the interest rate lock-in could disappear, potentially making more starter homes available.

Broker practices are about to change.

It’s not just the cost of loans that can affect the housing market. The National Association of Realtors, a powerful group that has long set the guidelines for home sales, has agreed to settle a series of lawsuits in a move that could shake up home buying.

Pending court approval, the settlement would mean that real estate agents working with home sellers would no longer have to provide clearly advertised compensation to buyer agents. The change will likely bring down the industry-wide standard commission of 5 or 6 percent.

It is not clear what exactly this means for housing costs. There is speculation that this could be the case Reduce prices, in part because lower commissions could make it slightly more attractive for sellers to list their homes.

But there are limits to how much prices can fall. Igor Popov, chief economist at Apartment List, said that while the decision could save Americans money on transaction costs, home sellers would likely continue to try to charge as much as possible in competitive markets.

“It’s a big problem for the industry, but I don’t think it’s a big problem for prices and quantities,” he said.

Officers aren’t sure what the consequences will look like. Jovanni Ortiz, a real estate agent on Long Island, said he had heard colleagues wondering whether agents would leave the business — but no one knew exactly how much it would cost agents and reshape home shopping.

“It’s too early to say,” Mr. Ortiz said.

The White House has policy in mind.

President Biden has fixated on high housing costs in recent weeks, wary that Americans’ struggle to rent or buy a home is weighing on the country’s economic optimism.

In his State of the Union address, he announced new ideas to help homebuyers. His latest budget request includes more than $250 billion in spending proposals to address high housing costs, including building or renovating two million homes and increasing housing subsidies for low-income workers.

But it seems unlikely that most of these ideas will have immediate impact: There appears to be little chance of a major housing bill passing this year, with the November elections approaching and Republicans in control of the House of Representatives .

Still, Mr. Biden has directed his administration to act unilaterally to reduce certain costs associated with home buying. He has taken steps to eliminate insurance costs for federally backed mortgages, potentially saving $1,000 or more per purchase. This week he called on real estate agents to pass on the savings from lower required commissions to consumers.

Housing supply is increasing in the rental sector, but this may be short-lived.

If there is one bright spot in the field of housing affordability at the moment, it is the rental market.

In recent months, the severe supply crisis has eased, causing rents for new leases to rise grow only moderately or even declines in some markets.

There were a number of large rental buildings built in some southern and mountain western cities, putting pressure on monthly prices. But there will be relatively little new supply next year and into 2026, Mr. Popov said, so the cooling off could be limited.

The supply of owner-occupied homes is a less sunny story. It’s not just that fewer sellers have put homes on the market – housing construction has taken a hit from higher interest rates. That has, and has, exacerbated a shortage that has been growing for years prices have remained high even though high mortgage rates have depressed sales of both new and existing homes.

If builders see signs of a thaw in the market, they may be more willing to build new homes. But that will happen, because many shoppers will likely be lured by slightly lower rates.

“Demand is so strong that it is unlikely that the housing market will fall apart,” said Yelena Shulyatyeva, senior economist at BNP Paribas, noting that many millennials are still looking to buy, among other trends.

The result? Mr Popov believes that the housing market can return to some normality in the coming months. Prices are unlikely to fall, but increases could be slower and steadier compared to the big rebounds since 2020.

“We have felt the aftershocks of the many powerful blows to the snake market that the pandemic delivered,” he said. “We are going to return to more normal numbers and a more normal feeling in the housing market.”