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Inflation may have (nearly) returned to normal. But prices don’t feel normal.
The Federal Reserve cut the federal funds rate by 50 basis points in September as inflation has moved closer to its 2% target. This was the first rate cut since the onset of the pandemic and might be a turning point in the Fed’s years-long battle to get prices under control.
Despite the Fed’s move, though, average Americans are feeling downright crabby about the economy. With the prices of many goods and services still much higher than before the pandemic, it’ll likely take much longer for prices to not seem so out of hand.
While groceries and gas are constant reminders of price changes, neither bears as much weight on your finances as home ownership.
Purchasing a home was largely affordable in the years between 2009 and 2020.
The tide turned in 2022, though, as mortgage rates soared following the Fed raising interest rates to tamp down inflation. Prices also climbed thanks to a lack of available homes for sale, says National Association of Realtors® chief economist Lawrence Yun.
“We have had a lack of housing supply, which is why prices increase so much faster than income growth,” Yun says.
Many existing homeowners are unwilling to give up their low mortgage rates and are staying put. Meanwhile, builders have been cautious with construction for new homes when so many potential buyers are priced out.
The good news is that borrowing costs have fallen from recent highs—the average 30-year fixed rate was 6.09 in mid-September compared to 7.8% in the fall of 2023. And they may have a bit further to drop in the near future.
“Rates will probably be around 6% by the end of this year,” Yun says. “Next year they might be slightly under 6%, maybe 5.50%.”
Just don’t expect the abnormally low mortgage rates that spurred so much demand in the early part of the pandemic to come back anytime soon.