By Sarupya Ganguly
BENGALURU, Sept 15 (Reuters) – U.S. mortgage rates will stay higher than previously forecast and decline only modestly over coming quarters, a Reuters poll of property experts showed, keeping home price growth muted through next year.
Those borrowing rate expectations, published a day before the U.S. Federal Reserve is set to raise its benchmark interest rate for the first time this year, risk being too low and leave government efforts to revive the U.S. housing market looking increasingly hollow.
The average 30-year mortgage rate, which underpins most U.S. home loans, has risen nearly 70 basis points to about 6.85% since the U.S.-Israeli war with Iran started in late February.
That rate has tracked the rise in the benchmark U.S. 10-year Treasury yield which crossed the politically sensitive 5% level on Monday despite Treasury Secretary Scott Bessent’s previous attempts to cap it. Total U.S. public debt touched a record $40 trillion last month.
Housing analysts in the August 28 to September 14 poll predicted mortgage rates to average 6.60% and 6.52% over the next two quarters, up from 6.30% and 6.24% forecast in June – a change that still clings to their long-held call for a decline. Annual averages were put at around 6.40% for this year and next.
Forecasters predicting mortgage rates to fall have been forced to revise their projections higher in 12 of the 19 quarterly surveys since the start of 2022.
That suggests prospects for a housing revival from lower mortgage rates may yet be bleaker than analysts’ predictions.
A separate Reuters survey also showed bond strategists’ conviction in their declining yields outlook was fraying. A subset accurately predicted the 10-year would hit 5% first.
“The primary risk is mortgage rates remain higher for longer than expected because long-term yields are being driven more by federal borrowing needs, inflation expectations and term premium than Fed policy rates,” said Crystal Sunbury, senior real estate analyst at RSM.
Term premium is the additional compensation investors demand for holding long-term debt.
“Housing activity has limited capacity to absorb further rate increases. Above roughly 6.5-7.0% (mortgage rates) affordability pressures intensify and transaction volumes are likely to weaken further,” she said.
A Reuters poll of economists published on Monday predicted the Fed will raise its federal funds rate by a quarter-percentage point to a 3.75-4.00% range this week. Interest rate futures are betting on nearly three rate hikes by end-March.
“Even if the Fed begins easing, mortgage rates may not decline as quickly as historical relationships would suggest, keeping them in the mid-to-upper 6% range,” RSM’s Sunbury added.
Average home prices measured by the S&P Cotality Case-Shiller 20-City Index were forecast to rise 1.5% this year – barely outpacing last year’s 14-year low of 1.4% – and 2.3% in 2027, well below U.S. consumer inflation.
Existing home sales, which make up 85-90% of total transactions, were forecast to average an annualized 4.0 million-unit rate this quarter and next before rising to 4.1 million in Q1 2027 – well below a near 15-year peak of 6.6 million in early 2021.
Already about 60% above pre-pandemic levels, home price rises have far outpaced income growth over the same period, straining affordability and preventing many first-time buyers from entering the market.
That puts to the test whether the 21st Century ROAD to Housing Act which President Donald Trump spurned in June but got passed in a rare bipartisan agreement in Congress will speed up construction and boost the supply of affordable homes.
“Affordability and the pressure on demand is capturing much of the attention right now. But the underlying problem, even in the best of circumstances, is a shortage of housing stock,” said Gary Schlossberg, global strategist for Wells Fargo Investment Institute.
“Most incentives have been on the upper end of the market. That’s aggravated the shortage for first-time and lower-income home buyers.”
(Other stories from the Q3 global Reuters housing poll)
(Reporting by Sarupya Ganguly; Polling by Aman Kumar Soni; Analysis by Jaiganesh Mahesh; Editing by Hari Kishan, Ross Finley and Lincoln Feast.)
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