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While few of us have met anyone who can predict the future, many can make well-educated guesses based on historical data. What's the past telling us about what we can expect home prices to do for the remainder of this year? It clearly suggests that home costs will continue to increase into 2025.
Here are two factors that lead us to this conclusion -- as well as what buyers should look out for as they gear up to apply for a mortgage .
Interest rates -- the good, the bad, and the ugly
About a year into the COVID-19 pandemic, it became clear that inflation was a problem. The price of everything, from toilet paper to orange juice, spiked dramatically. Whether it was due to supply chain shortages, corporate greed, or a combination of the two, it was painful for the average consumer.
One of the Federal Reserve's key functions is to support the stability of the U.S. economy. The Fed does that by raising or lowering the federal funds rate, depending on whether the economy needs to pick up the pace or slow down. Any time inflation is an issue, the Fed moves to slow the economy down enough to put the brakes on high prices.
History shows us that the Fed's strategy works but can take time. For evidence, we need only look at the latest series of Fed rate hikes. In March 2022, the month the Federal Reserve initiated the first rate hike, the inflation rate was 8.5%. By August 2024, after a series of hikes, the inflation rate had fallen to 2.5%.
Remember, the goal of rising interest rates is to slow spending. When rates are on the rise, people buy fewer high-ticket items, like cars, appliances, and homes. In short, it can slow overall inflation, and prices fall to a more manageable level.
Dropping interest rates will drive more buyers into the market. Any time the demand is greater than the supply, prices soar.
Low inventory -- the real culprit
Think back to the early days of the pandemic. To boost the U.S. economy, the Fed dropped its benchmark rate until it hit historical lows. With 2% and 3% mortgages, borrowing money was so affordable that potential home buyers came out in droves, hoping to buy a home with dirt-cheap mortgage rates .
Quickly, the market became too hot, and home prices spiked dramatically. Homeowners who might have wanted to sell their homes suddenly got cold feet, afraid they couldn't afford something new. And so they stayed put.
It didn't take long for inventory to shrivel. Markets that once thrived now had so few properties for sale that homes listed sold for far more than market value. Simply put, there were far more potential buyers than sellers. To date, nothing has managed to break that dam.
Until inventory picks up, we can expect home prices to continue to increase.
Keep an eye on inventory
For those of us who remember how desperate we were to buy our first home or find a new place to live following a job relocation, it's easy to understand how frustrating this situation is for others. However, history shows us that our economy is like a living thing, constantly changing.
As you notice more houses being listed and homes remaining on the market for longer, it's time to ensure you have your ducks in a row. Check your credit reports to make sure there are no errors. Rework your household budget to figure out how much you can afford to pay for a home, and put feelers out, letting people know what you're looking for in your next house.
Ask anyone who tried to buy a house in 1981 whether they believed it would ever be possible for them. That year, the fixed-rate average on 30-year mortgages hit 16.64%, and some home buyers simply gave up -- at least until things changed.
The market ultimately controls what happens with interest rates and home prices. It's a matter of waiting until market conditions swing back in your direction. In the meantime, take this opportunity to check your credit report for any errors, make sure your household budget is in good shape, and investigate the type of mortgage that will work best for you.
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