Morningstar is making a bold call that housing market affordability will be restored by 2025. Here's how

Morningstar predicts that the average 30-year fixed rate mortgage rate will drop to 4.00% by 2025. Getty Images

The affordability of the current housing market is on par with what buyers saw at the height of the housing bubble in 2006 when mortgage rates, home prices and income levels are factored in. That will happen when mortgage rates go from 3% to 7% right after that Pandemic housing boom Raising national housing prices by more than 40%.

there Three cranes It can help mitigate future housing affordability: lower mortgage rates, lower housing prices, or higher incomes. Due to the volatility of the financial markets, mortgage rates are always the lever that can have the greatest impact in the short term.

Morningstar’s new housing report predicts that mortgage rates will indeed be the primary lever helping to ease housing affordability.

As of Friday, the average fixed rate mortgage is for 30 years Tracked daily mortgage news It stands at 7.14%. Morningstar expects the trend to turn downward in the second half of the year, and we’ll average 6.25% for 2023. Morningstar’s forecast model then forecasts mortgage rates to average 5.00% in 2024 followed by 4.00% in 2025.

View housing affordability drivers, according to the Federal Reserve Bank of Atlanta chart

“The Fed engineered a massive increase in interest rates in order to combat high inflation. We expect it to cut the federal funds rate aggressively in the coming years, leading to [Federal funds] Morningstar economists write that the interest rate will fall from 5% currently to less than 2% by 2025.” Once the Fed wins the battle against inflation, its priority will shift to a jump in economic growth, which will require lower interest rates. much, in our .view.”

Over the long term, Morningstar expects mortgage rates to remain low. They pointed to factors such as population aging and slowing productivity growth that will put downward pressure on long-term rates, such as mortgage rates.

“No matter what happens in the next few years, we expect interest rates to eventually stabilize at the low pre-pandemic levels. The low interest rate regime will resume once the dust from the pandemic economic volatility clears,” Morningstar wrote. “Our expectations for long-term interest rates are driven by secular trends. Factors such as aging demographics, slowing productivity growth, and increasing inequality have depressed real interest rates for decades, and these forces have not gone away.”

Morningstar economists also expect the other two pillars to help: rising incomes and falling home prices.

“Our revised home price forecasts now expect new and existing home prices to decline by 6% and 4% over the 2022-2024 period, respectively,” Morningstar economists wrote. They call their forecast a “moderate correction,” adding that a sharp decline in home prices could be prevented by the fact that “the inventory of existing homes for sale remains below pre-pandemic levels.”

Among forecasters, Morningstar is on the low side when it comes to mortgage rates. Heading forward Mortgage Bankers Association And Fannie Mae We expect the average 30-year fixed mortgage rate to end in 2023 at 4.9% and 5.6%, respectively. Moody’s Analytics expects mortgage rates to fall to 6% by late 2024, and to 5.5% by the end of 2025.

On the price front, Morningstar is on the downside. Companies like Zillow and CoreLogic think national home prices will rise 5.0% And 4.6%, respectively, over the next twelve months. Moody’s Analytics doesn’t think a bottom is in, and expects a peak-to-trough decline of about 8% for national house prices.

When it comes to mortgage rates and home price projections, it may be best to approach it with a grain of salt. Uncertainty in the economy makes it difficult to predict both mortgage rates and house prices.