How to Fix the Real Estate Market

Interest Rates and Housing Affordability - Lowering interest rates by the Federal Reserve (Fed) does not inherently make housing more affordable; in some cases, it can make it less affordable [2][3] - Mortgage rates are more dependent on the long end of the yield curve (e.g., 10-year and 30-year yields) and typically trade 1.5% to 2% higher due to associated risks [6] - The Fed is projected to lower interest rates in September, but this may change based on labor market reports and inflation readings [7] - If the Fed cuts rates preemptively to avoid a recession, it can reignite "animal spirits," causing markets to rise and the bond market to reprice inflation risk, potentially increasing mortgage rates [12][13][14] - Cutting rates prematurely may worsen the real estate market [34] Asset Prices and Housing Market Improvement - Lower asset prices are needed to achieve a durable improvement in housing affordability [22][23][25] - Lower asset prices lead to a lower long end of the yield curve, which in turn leads to lower mortgage rates [39] - The market may take 6 to 12 months to accept the reality that lower asset prices are necessary to improve the real estate market [23] Market Dynamics and Future Outlook - The housing market is currently seeing a drop in new privately-owned housing units under construction due to unaffordability [20][21] - The author anticipates that after a second round of rate cuts, potentially starting in September, the long end of the yield curve will likely increase, leading to higher mortgage rates [29][30] - It may take a couple of years for the market to accept that lower asset prices are needed to improve the real estate market [33]