Mortgage rates are poised to dip to a three-year low, as the Federal Reserve announced its third consecutive rate cut of the year Wednesday.
That might not be good news for first-time homebuyers, warned Mark Fleming, an economist at First American, hours before the Fed announced the cut. The summer’s accessible financing released a surge of first-time homebuyers into the market but that drives up home prices and reduces the supply of low-cost starter homes on the market, said Fleming.
“All those millennials who we thought weren’t ever gonna buy homes are now demanding homes,” said Fleming, citing a recent TransUnion report, which projected a surge of first-time homebuyers over the next three years. “All else equal, if rates go down, I can afford to buy more. So, I go and I bid against all my fellow first-time homebuyers, and the price gets escalated. And so the result is higher numbers.”
Home-price appreciation is re-accelerating after a 16-month slowdown, according to the latest S&P CoreLogic Case-Shiller national home price index.
Homebuyers are having a hard time finding affordable homes on the market. Availability of homes under $200,000 has been shrinking since 2014, and analysts predict that homes in the $200,000 to $750,000 range also dwindled in October.
And the problem will only get worse, according to Fleming, noting that about two-thirds of American households are already homeowners. Low rates led to a refinancing boom and as homeowners lock in low mortgage rates, they will have less incentive to move and sell their existing homes.
“When or if rates go up again, that lock-in effect means they’ll want to stay put,” Fleming said. “They won’t want to move, and it really leaves that proverbial next generation out in the cold.”
Sarah Paynter is a reporter at Yahoo Finance. Follow her on Twitter @sarahapaynter
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First-time homebuyers will life housing market through 2022: TransUnion