The spring homebuying season isn’t what it used to be, thanks to the Fed

New York (CNN) — Spring has undeniably been the best time to put your home on the market. The ideal weather displays homes in the best light and the timing makes it a more favorable season for people to move, especially with the end of the school year.

But the Federal Reserve is throwing a wrench into the plans of many would-be homebuyers.

A few months ago, rate cuts, which would help lower mortgage rates, seemed like a sure shot by now as inflation continued to get closer to the Fed’s 2% target month after month.

That progress has dissipated with multiple different inflation measures heating up again. That’s left central bankers with few options other than keeping interest rates at their current multi-decade highs for even longer, or potentially even raising rates.

All that has caused the spring homebuying season to take a timeout — and could spell trouble for the remainder of the year.

“Higher rates are curtailing inventory,” Zillow senior economist Nicole Bachaud told CNN. “Some owners who locked in low rates during the pandemic have been reluctant to sell and give up that low monthly payment, especially in the most expensive markets where mortgage costs are more sensitive to changing rates.”

But it’s a bit of a chicken or egg situation, she said. “Buyers faced with a sharp increase in mortgage rates at the start of the year have been slower to return to the housing market this spring. However, it’s unclear if they’re waiting for lower interest rates or if they’re looking at the overall affordability picture.”

Housing affordability, by and large, is a product of the number of homes on the market. And homeowners who secured low-rate mortgages when the Fed kept rates at ultra-low levels during the pandemic have little incentive to move and risk paying much higher rates.

At the same time, if home prices came down but mortgage rates remained high, Bachaud said she suspects more people would purchase homes. Right now, however, the average 30-year fixed-rate is at the highest level so far this year and home prices are rising at their fastest pace in over a year.

Higher rates aren’t deterring all homebuyers

The homebuyers who are more likely to sit this spring on the sidelines already own a home, said Sam Khater, chief economist at Freddie Mac. But first-time homebuyers who are “tired of elevated rents or have growing families have continued to purchase in a rising rate environment,” he added.

Also, in certain parts of the country like Texas and Florida, new home construction is providing sizeable price relief, Bachaud said. That’s attracting more homebuyers to those markets. In some cases, homebuilders have even offered buyers perks like mortgage buy-downs to incentivize people to move into neighborhoods that may be in less developed areas compared to where existing homes are located.

What the rest of the year could look like

The spring homebuying season “largely determines how the year will turn out for the housing market,” Khater and his team of economists at Freddie Mac said in a recent report. Since 1999, more than a third of home sales for the entire year occur between March and June on average, according to Freddie Mac data.

Given the Fed is in no rush to cut interest rates, Khater expects mortgage rates to remain elevated for longer. That’s likely going to constrain housing inventory because homeowners don’t want to give up the lower rates they have.

Still, demand this spring has been even stronger than last year in terms of how many people are applying for mortgages from Freddie Mac. Taken together, all these factors will likely put upward pressure on home prices, Khater and his team said in the report.

Zillow’s Bachaud is also predicting home prices to grow higher this year, but not by more than 2%.

“Our outlook does depend on mortgage rates, which are creating their own seasonality,” she added. “If rates fall later in the year, we might see a secondary boost to home sales late this summer or even this fall.”

That’s unlikely to happen though. As of Tuesday, investors think the first rate cut of the year will come in November, according to fed funds futures.

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