According to a recent forecast by Fannie Mae, aspiring homeowners have reason to be optimistic. The 30-year mortgage rate is projected to drop below 6% by the end of 2024, and even better news - the U.S. economy is poised to avoid a recession.

Fannie Mae's January forecast outlines the factors behind their expectations for lower mortgage rates and a narrowly avoided economic downturn. While they anticipate a slowdown in U.S. economic growth this year, they have revised their earlier prediction of a modest recession and instead anticipate "positive but below-trend growth" in 2024.

There are several key reasons for this revision. The Federal Reserve's indication that rate cuts were on the horizon for 2024, combined with declining inflation and an upward trend in real personal income growth, all contribute to Fannie Mae's more optimistic outlook.

Doug Duncan, the Senior Vice President and Chief Economist at Fannie Mae, stated, "Inflation's decline and the resultant Fed pivot to signaling future rate cuts lead us to believe that home sales and mortgage originations likely bottomed out in the second half of 2023 and that a gradual improvement is now underway."

While lower mortgage rates are certainly promising, the housing market still faces a significant obstacle known as the "lock-in effect." Approximately nine out of ten homeowners have mortgage rates under 6%, causing many to feel financially tied to their current low rates. As a result, there is a limited number of homes listed for sale, which has led to a significant decrease in home sales - reaching a 29-year low in 2023.

The upcoming decline in mortgage rates could potentially "thaw" the housing market by offering homeowners greater incentives to move and take on new loans with higher interest rates. However, overcoming the lock-in effect will be necessary for a full rebound in the housing market.

Overall, Fannie Mae's forecast brings hope to those seeking to enter the housing market, suggesting that lower mortgage rates and a stable economy are on the horizon.

The Impact of Low Resale Inventory on the Housing Market

Low resale inventory has become a boon for home builders, who are experiencing an increase in demand from buyers. In the past, newly built homes only accounted for approximately one-tenth of the housing inventory. However, last year, their share rose significantly to one-third.

According to Fannie Mae, if mortgage rates were to fall below 6% by the end of 2024, it would prompt more homeowners to refinance. This would "thaw" the existing-home sales market and alleviate the lock-in effect. Furthermore, if rates were to drop even lower, reaching the 5% range, it would further stimulate home sales.

Despite these positive indicators, Fannie Mae emphasizes that a complete recovery to pre-pandemic levels will take years. This is due to the fact that housing affordability remains stretched extremely thin when compared to historical standards relative to household incomes.

Buying a $400,000 Home at a 6% Mortgage Rate

To gauge the affordability of buying a $400,000 home at a 6% mortgage rate, let's consider the following information provided by Lisa Sturtevant, chief economist at Bright MLS. With a 7% mortgage rate, the monthly payment for such a home would be approximately $2,900. However, if rates were to fall to 6%, the monthly payment would reduce to $2,700.

It is worth noting that as of December 2023, the typical price of a resale home in the U.S. was around $383,000. Conversely, the price for a newly built home was slightly higher at $413,200.

In order for a buyer to comfortably afford a home with housing costs accounting for a maximum of 30% of their income, estimates suggest that they would need to earn at least $100,000 annually.

Future Prospects of the Housing Market

Although a potential drop in mortgage rates to 5% coupled with an increase in home sales may appear promising, the future of the housing market ultimately rests on the trajectory of incomes. Mark Palim, Fannie Mae's deputy chief economist, emphasizes that while home prices reached an all-time high in October, rising for the ninth consecutive month according to the S&P Case-Shiller Home Price Index, it is essential to monitor income trends.

In conclusion, the impact of low resale inventory has led to an increase in demand for newly built homes. However, the road to a full recovery in the housing market is expected to be gradual, with housing affordability remaining a significant concern relative to household incomes.