A house made of dollar bills.
Illustration by Lanette Behiry/Real Estate News

Could home prices and interest rates both fall? 

Morningstar has made a bold prediction about where mortgage rates and home prices are headed, but for now, prices are still rising.

July 11, 2023
3 minutes

Key points:

  • Reports from Black Knight and CoreLogic found small gains in home price appreciation in May.
  • Morningstar researchers, however, are forecasting significantly lower mortgage rates and home prices in the next two years.
  • Ultimately, the Fed will play a major role in what happens when they meet this month, either continuing to pause rate hikes or bringing them back.

While spring and summer are typically prime time for the real estate market, this year has been an outlier. Stubbornly low inventory — which is largely blamed on homeowners who are reluctant to give up their record-low mortgage interest rate — has kept transactions equally low in many markets. 

However, home sale prices are back on the rise. But will that last? This is where the experts appear divided. 

Price growth is up, but not much

In CoreLogic's latest report on home price growth, researchers predict that annual U.S. home price gains will tick up to 4.5% by May 2024. However, the current 1.4% year-over-year home price appreciation is the lowest in 11 years, the research firm concedes. 

Additionally, finance and real estate research firm Black Knight just released its latest Mortgage Monitor report and indicated that its own Home Price Index (HPI) — a measure which gauges the overall health of the market — hit a new record high in May, tallying a 0.70% seasonally adjusted month-over-month gain, which would be equivalent to an annualized growth rate of 8.9%, Black Knight researchers said. 

Similar to CoreLogic, Black Knight also noted mixed price appreciation. According to its report, 27 of the 50 largest markets — largely metros across the Midwest and the Northeast — have returned to their prior peak prices or set new records this spring. Meanwhile, markets in the West remain relatively precarious. May's price growth, nationally, was just 0.1%, which also appears to corroborate Redfin's report last week on the June sale-to-list price being 100.1%

Despite the continued rise in home prices, some detractors believe they will soften, leading to improved affordability in the coming year or two. Most notably, in a recent note to clients, Morningstar analysts said they see the Fed reversing its course and enacting cuts, which could lead to a return of ultra-low mortgage interest rates. That prediction is in contrast to many industry experts who believe cuts are unlikely and 3-4% mortgage rates are a thing of the past.

How low could rates (and prices) go?

"We expect interest rates to ultimately settle back down at the low levels that prevailed before the pandemic," Morningstar researchers wrote. "We forecast the average 30-year fixed mortgage rate will average 6.25% in 2023 but decline to 5.00% in 2024 and 4.00% in 2025."

It's a bold call, said Fortune's Lance Lambert in response to the report. The Fed signaled last month that there would be further rate hikes, not cuts this year. So how could we get back to 4% mortgage interest rates?

"Our long-term interest-rate projections are driven by secular trends. Factors such as aging demographics, slowing productivity growth, and increasing inequality have acted to push down real interest rates for decades, and these forces haven't gone away," Morningstar's note read. "Our revised home price forecast now projects new- and existing-home prices to decline 6% and 4% over 2022 to 2024, respectively."

Despite "secular trends," the Federal Reserve still has a lot of influence over current market conditions, particularly as they relate to mortgage interest rates and the cost of borrowing. Job growth was sluggish in June and inflation has started to come back down to earth. But is it enough to motivate the Fed to continue to pause rate hikes, or even introduce cuts?

Again, the experts appear mixed. 

"A rate cut in 2023 seems wildly unrealistic because how can you cut rates when unemployment is at 3.5%? It's just not logical," Jonathan Miller, CEO of the real estate appraisal and consulting firm Miller Samuel, told Real Estate News last week.

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