How America's Pent-up Housing Demand Will Be Unleashed

An aerial view of homes in a housing development with new houses under construction (UPPER C) on September 08, 2023 in Santa Clarita, California.

A cooling down of the U.S. labor market could encourage the Federal Reserve to finally lower interest rates, National Association of Realtors’ Chief Economist Lawrence Yun told Newsweek. This, in turn, could lower mortgage rates and unleash the pent-up demand from aspiring homebuyers.

The addition of thousands of jobs in the past couple of years has added to this reservoir of demand for housing in the U.S., which is likely to keep prices up unless more homes are built around the country. But the jobs sector showed signs of slowing down in April, after experiencing its strong recovery since the 2020 recession.

“An economy that is too hot is not good for interest rates. Hence, the latest news of some cooling in the labor market could mean the topping-out of mortgage rates this week before more sustained declines through the remainder of this year,” Yun said in a written statement shared with Newsweek.

In April, the U.S. economy added 175,000 net new payroll jobs, according to the latest data from the Bureau of Labor Statistics released on Friday. It’s one of the slower monthly job gains since the reopening of the economy after the COVID-induced lockdown and it’s far below the addition of 235,000 jobs economists expected.

The unemployment rate ticked higher to 3.9 percent from 3.8 percent in March—another sign that the labor market might be cooling down.

This is, in part, what the Federal Reserve wanted: with a strong job market, the central bank could keep interest rates high to fight inflation without fear of plunging the economy into a recession. But with a weaker job market, keeping interest rates high is too risky.

The Fed is now more likely to lower interest rates, a move that investors have wanted for months after the central bank said it was done with its aggressive rate-hiking campaign in December 2023.

“The Federal Reserve is delaying and is cautious about inflation, but six to eight rounds of rate cuts through the end of 2025 are likely to bring the interest rates down from current high levels to match those during the pre-COVID years,” Yun said, adding caution to his prediction.

“Do not expect any major declines in mortgage rates, however. The federal budget deficit is massive. Heavy government borrowing will mean less money available for mortgage lending,” he added.

While a weaker labor market could help create the right conditions for a greater pullback in housing prices, the number of additional jobs created in the past few years has made it so that there’s a lot of pent-up demand for housing in the country, especially as the country is still plagued by a historic shortage of supply.

“There are 40 million more jobs and 70 million more people living in the country now compared to then [last year],” Yun said. “That is, there is a sizable stored-up housing demand to be released into the market in the upcoming years.”

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