The storm clouds that have been persistently gathered above the housing market appear to be brightening somewhat, but according to new commentary from Wells Fargo, further challenges holding back the mortgage market may be at play, continuing to temper the bank’s outlooks on both real estate and the economy as a whole.
Mortgage rates are already slipping downward, driven by a widespread expectation for a federal funds rate cut in September, potentially followed by other cuts soon after. The average 30-year fixed mortgage rate fell to 6.5% during the week ending Aug. 15, some 70 basis points below the 2024 peak of 7.2% reached in May. Wells Fargo economists Charlie Dougherty, Jackie Benson and Ali Hajibeigi wrote that they expect mortgage rates to fall “more meaningfully” over the next year and a half as the Fed begins rolling back its hawkish policy.
Wells Fargo expects this year to close with an average 30-year mortgage rate of 6.5%, followed by an average of 5.9% by the fourth quarter of 2025. Any further rate easing is obviously welcome, especially given the tepid reaction from homebuyers to rates dropping thus far.
“The lethargic response to lower rates suggests a more challenging macroeconomic backdrop may be weighing on buyer demand at present,” Wells Fargo’s economists wrote. “The loss of momentum in the labor market recently, and potential for further weakening down the road, might be causing buyers to postpone a home purchase until more stability arrives.
“What’s more, real income growth has downshifted alongside a slower pace of hiring and increased supply of workers. Looking ahead, these macroeconomic challenges are not likely to improve in the near-term.”
Wells Fargo also hypothesized that the recent shift in real estate agent commissions may be holding back activity. New rules established via settlement agreed upon by the National Association of Realtors officially came into play on Aug. 17, giving buyers more control over commission negotiations. Wells Fargo noted that “a meaningful improvement to overall buyer affordability [through the new commission rules] does not appear likely,” although the potential of lower transaction costs once the rules went into effect could have kept some would-be homebuyers in a holding pattern until later in the year.
Overall, though, it’s the unfavorable affordability environment that’s keeping the pace of housing activity meager. According to the National Association of Realtors, the median monthly mortgage payment is double what it was four years ago ($2,175 in June compared to $1,046 in January 2020), and the organization’s Housing Affordability Index remains anchored at lows not seen since the 1980s. The share of household income taken up by an average mortgage payment is at 26.8%, up from 14.8% in early 2020.
With home prices still on the rise, the potential for consequential near-term progress on affordability is faint, and that’s likely to keep sales weak. Wells Fargo’s current forecast calls for 4.2 million units in existing home sales by the end of the year, with an additional 674,000 units in new home sales. Those figures are expected to improve somewhat by 2025, when the bank’s economists project existing home sales of 4.5 million units and new home sales of 714,000 units.
“Lower rates should cement an inflection point for the residential sector and support a modest improvement in home sales this year and next, but a full-fledged rebound seems unlikely,” Wells Fargo’s economists said.
