The United States will likely avoid a recession. This could be bad news for homebuyers.

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  • The US economy could still avoid a recession. It’s not ideal for marginalized homebuyers.

  • A recession would likely cause interest rates to fall, lowering mortgage rates and increasing housing stock.

  • High borrowing costs and high prices are the new normal for now, said a real estate economist.

The United States will likely avoid a recession after all — and that could be bad news for buyers who are locked out of a frustrating and unaffordable housing market, according to Lawrence Yun, chief economist for the National Association of Realtors.

The Real Estate Economist saw mortgage rates and house prices remain flat – ie high – for the remainder of 2023, with the 30-year fixed mortgage rate declining to just 6% to 6.5% d end of the year.

It’s not the seismic change that some homebuyers are hoping for, with mortgage rates currently hovering around 7% for most of the past year. Part of the blame is on the strength of the economy, Yun said, and the U.S. avoiding a slowdown is likely to keep interest rates high across the economy. which means mortgage costs won’t move much from 20-year highs.

Yun pointed to the robust job market, with the economy adding 209,000 people in June, slightly less than in previous months. Inflation, meanwhile, has slowed considerably from its 41-year high last June, with prices only accelerating by 3% year-on-year.

“My starting point is that we don’t have a recession. We’re still creating jobs — maybe not as strongly — but still more jobs with each passing month,” Yun told Insider.

But no recession suggests the Fed won’t have to cut interest rates quickly to avoid putting too much pressure on the economy. Investors think it is almost certain that the Fed will raise rates once again this month, then see a strong likelihood that the central bank will hold its benchmark rate steady at 5.25%, 5.50% for the rest of 2023.

That could mean a longer wait for homebuyers as the higher federal funds rate influences higher mortgage rates.

High rates have hurt real estate activity over the past year as buyers are pushed away. Meanwhile, the high cost of borrowing has also added to the inventory shortage as high mortgage rates discourage homeowners from putting their properties up for sale as many have locked in lower borrowing costs over the past decade before the Fed’s tightening campaign.

This has the effect of supporting house prices even if demand remains weak due to rising mortgage rates.

Experts said affordability is unlikely to improve until mortgage rates come back more significantly, which could encourage more buyers to enter the market.

Yun doesn’t necessarily think that’s the case. Although house prices will remain high as mortgage rates hardly change, household incomes are rising an average of 4-5% each year, Yun said, meaning a sluggish housing market will give buyers time to catch up with high housing costs.

Still, it could take buyers years to bridge the affordability gap, as higher mortgage rates for longer are the “new normal,” Yun warned.

“If people can get 6% [mortgage rates], they consider themselves lucky. I think the new condition will be around 6%,” he added, consistent with what other real estate experts are seeing throughout the year.

Read the original article on Business Insider

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