Economist says activity could tick up even as affordability challenges continue
Despite the affordability challenges facing homebuyers, many buyers and sellers are finding their way back into the housing market, and one economist believes this may continue.
As interest rates have slightly declined, the gap between current rates and the average rates of existing mortgages has shrunk. This factor, combined with life events, is encouraging sellers to enter the market, opening up increased inventory for buyers.
Sam Williamson (pictured top), senior economist at First American, believes lifestyle reasons combined with surging housing equity will bring people into the market despite other factors.
“Despite high mortgage rates, more sellers are deciding to move due to major life events, which are becoming more significant than waiting for a substantial drop in rates,” Williamson told Mortgage Professional America.
Williamson believes rates may remain elevated as the Federal Reserve holds off on additional cuts to assess the fallout from the tariffs and their impact on inflation. Realizing that rate reductions may be slowed, or that rates may go back up in the short term, buyers are starting to come to terms with elevated rates.
“The Fed is likely to remain cautious about cutting rates as policymakers assess the fast-changing tariff policy landscape and its impact on the economy,” Williamson said. “With mortgage rates hovering between 6% and 7% for the past 12 months, home buyers seem to be gradually adapting to the higher rate environment and are starting to make moves.”
While the Fed may show restraint in the short term, Williamson still believes there will be further rate cuts later in the year, which could further reduce the gap between new mortgage rates and existing mortgages.
“The market may continue gaining momentum, even if the pace of rate cuts is slower than initially anticipated late last year,” Williamson said. “Our base case remains that the Fed will deliver rate cuts later in the year, which should put downward pressure on borrowing costs, including mortgage rates.”
Rate lock-in effect loosening
Odeta Kushi, First American’s deputy chief economist, released a report last week discussing how the rate lock-in effect had loosened a bit, allowing for more housing inventory to hit the market.
“In the fourth quarter of 2024, the average interest rate on outstanding mortgages was 4.3%, while the average prevailing mortgage rate was 6.6%,” Kushi said. “This was a difference of 2.3%. In monthly payment terms, that’s a payment of approximately $1,600 at the 4.3%, versus a $2,000 payment at the 6.6%.
“The rate lock-in effect will continue to limit housing market potential, but it has loosened enough for some potential sellers to list their homes for sale and contribute to higher for-sale inventory and more sales activity.”
As Kushi notes, the market still faces challenges. According to the National Association of Realtors (NAR), March’s existing home sales were 4.02 million, short of the expected 4.2 million. This was the largest monthly decline since November 2022.
“Home prices are now growing at their slowest pace in nearly 13 years, with over a dozen markets posting year-over-year declines, a development that suggests some pockets of the country are shifting toward a more buyer-friendly market,” Williamson said. “Yet, these boosts in affordability haven’t been enough to get buyers in the front door this spring, as existing-home sales fell 5.9% last month, the biggest drop since November 2022.
“This suggests that further price adjustments may be necessary to restore market momentum amid ongoing affordability challenges and broader economic uncertainty.”
In addition, weekly mortgage applications continue to decrease. In today’s weekly survey from the Mortgage Bankers Association (MBA), applications declined 4.2% on a seasonally adjusted basis from one week earlier.
Resilient market could bring spring rebound
Williamson is hopeful that a resilient labor market and continued wage growth could allow the market to rebound, even in the face of affordability issues and market volatility.
As Trump-era tariffs disrupt markets, Curinos’ Rich Martin sees a troubling trend—fear and uncertainty replacing confidence in housing. He urges brokers to seize local opportunities. https://t.co/APxQIOp6js
— Mortgage Professional America Magazine (@MPAMagazineUS) April 29, 2025
“While the spring home-buying season started sluggish, there is still potential for a modest rebound,” Williamson said. “Affordability challenges and personal finance worries have eroded consumer confidence, and the impact of rising mortgage rates is evident in lower sales figures. However, the hard data points to a resilient labor market and steady real wage growth. Should these fundamentals continue to hold while economic uncertainty diminishes, we might see home buyers taking advantage of more favorable conditions later in the spring and summer.”
The question will be how much affordability and volatility affect interest rates and inflation. If affordability continues to be challenging, even with increased inventory, buyers may still be reluctant to enter the market.
“At the same time, external pressures, such as economic concerns, could make buyers more cautious about making significant financial decisions like purchasing a home,” Williamson said. “This may necessitate a larger rate drop to convince buyers to enter the market.”
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