The high cost of buying a home and low inventories are continuing to slow the sales of homes, but there are signs of a positive shift in the market. Home sales in the Chicago area picked up month over month by 7.4%. The number of homes for sale was up 20.6% year to date and up 12.4% monthly. Nationally, the inventory of existing homes for sale grew 6.7%. Homes that are priced to the market sell quickly. Starck Real Estate had the highest number of transactions in May in its 60-year history.
High interest rates have created a paradox. Intended to slow inflation, they have caused the opposite effect in the housing market. High mortgage rates caused would-be home sellers to hold off from selling keeping inventories low. The Wall Street Journal reports that two-thirds of outstanding mortgages have a rate below 4%. If these homeowners moved, they would have to pay close to 7% for a new 30-year mortgage. The resulting tight supply has pushed prices higher, shrinking the pool of buyers who can afford a home.
But relief may soon be on the way. Inflation fell to 3% in June and the Federal Reserve’s favored inflation measure, Personal Consumption Expenditures (PCE), increased by 2.6%, close to the Fed’s target inflation rate of 2%. Fed Chairman Jerome Powell signalled a high probability of an interest rate cut in September. The bond markets have already priced in the rate cut and mortgages have fallen below 7% to 6.89%. Future cuts will proceed slowly and there is a lag time in the effect of rate cuts, but the economy appears to be headed in the right direction.
The job market continues to show strength as nonfarm payrolls increased by 206,000 in June and unemployment was unchanged at 4.1%, Unemployment in the Chicago Metro area is at 4.8%. There are now 6 million more people employed in the US than before the COVID-19 pandemic. The economy is growing faster as well. In the first quarter, the Bureau of Economic Analysis reports that the US economy grew by 1.4%. The Atlanta Fed in its GDPNow forecast for Q2 2024 is calling for a 2.7% increase in economic growth.
Lawrence Yun, Chief Economist for the National Association of Realtors, argues that the strong job market and falling inflation bodes well for housing. He projected existing home sales to increase to 4.46 million nationwide, a 9% increase from 4.09 million in 2023. He also predicted existing home sales to jump to more than 5 million in 2025 and show gains in eight of the next 10 years.