By Sarupya Ganguly
BENGALURU, March 17 (Reuters) – U.S. home prices will rise modestly this year and in 2027 as the market remains constrained by high mortgage rates and a shortage of affordable homes that will persist for years, according to housing analysts polled by Reuters.
Housing will not provide a boost to the slowing U.S. economy and there will be no near-term progress in the Trump administration’s aims to revitalize the market through cheaper mortgages, the February 27-March 17 survey released on Tuesday suggested.
The Federal Reserve is increasingly likely to keep interest rates where they are for longer due to discomfort with inflation levels that were already running too high before the U.S. and Israeli war with Iran.
Home prices are forecast to increase just 1.8% this year and 2.5% in 2027, well below a key inflation figure used by the U.S. central bank to track progress toward its 2% inflation goal. The Personal Consumption Expenditures Price Index excluding volatile food and energy prices was 3.1% on a year-over-year basis in January, before the start of the war.
The S&P Cotality Case-Shiller 20-City Composite Home Price Index shows average home prices are up more than 50% since the COVID-19 pandemic, but rose only 1.4% last year, the weakest performance in 14 years.
NO PROSPECT OF IMMINENT TURNAROUND
Forecasts were little changed from three months ago even though the war has lifted benchmark U.S. Treasury bond yields and boosted oil prices by around 50%.
“The story’s one of the housing market basically not doing very much,” said James Knightley, chief international economist at ING.
“A squeeze on affordability has meant demand has dropped away significantly and supply is constrained as well, and I don’t see the prospect of an imminent turnaround.”
Many homeowners are reluctant to sell, as it would force them to give up long-term mortgage rates locked in during the pandemic, some at less than half the current roughly 6.2% average rate on a 30-year mortgage. That rate is already up from 6.1% in recent weeks.
Existing home sales, which make up 90% of total transactions, were forecast to be steady at an average annualized 4.1 million-unit rate in the first quarter before edging up to around 4.2 million in the remaining three quarters of the year, well below the early-2021 peak of 6.6 million.
A weakening job market is also likely to restrain housing demand.
Crystal Sunbury, real estate senior analyst at RSM, a U.S.-based consulting firm, said consumers are now facing fewer available jobs as well as “an overall cautious sentiment in the economy, and now rising inflation again.”
“That creates a much more challenging environment for people to make a big purchase like a home,” she said.
A shift in Fed rate expectations to perhaps one more quarter-percentage-point cut this year or none at all will most likely keep borrowing costs elevated.
Thirty-year mortgage rates are predicted to average around 6.0% through 2028. Lawrence Yun, chief economist at the National Association of Realtors, predicted that rate could rise as high as 7.0% this year if the Iran conflict persists.
SHORTAGE OF 2.5 MILLION HOMES
Asked how many additional homes the U.S. needs to build to meet existing needs, the median estimate from 15 analysts was 2.5 million.
Most forecasts were in a range of 1.0 million to 4.7 million homes. One forecast said 10 million.
Nearly 80% of respondents, 11 of 14, said it would take more than five years to close the gap. The rest said less.
Construction activity has picked up modestly in recent months, but U.S. tariffs on imported raw materials are making homebuilding more expensive.
“Tariffs certainly act as a headwind,” said Gary Schlossberg, global strategist at the Wells Fargo Investment Institute. “You’re dealing with higher construction costs, a shortage of labor and pressure on wages and construction.”
(Other stories from the Q1 Reuters housing market polls)
(Reporting by Sarupya Ganguly; Polling and analysis by Aman Kumar Soni and Mumal Rathore; Editing by Ross Finley and Paul Simao)
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