Prepare for house price growth to slow, says First American chief economist

House price growth is set to cool as mortgage rates come down. Lance McMillan/Getty Images

• House prices have hit record highs, but they’re likely to rise more slowly now, one expert says.
• First American’s chief economist told Fortune that lower mortgage rates will cool price growth.
• Cheaper mortgages will empower buyers but encourage sellers who’ve locked in lower rates to list.

Surging house prices are likely to rise more slowly, a top economist predicted.

National home prices hit a fresh high for the tenth consecutive month in January, up 7.2% from a year earlier, per First American’s home-price index. However, that was slower than their 7.7% rise in the 12 months to December.

First American chief economist Mark Fleming told Fortune that the pace of price growth has likely topped out because mortgage rates are poised to decline this year.

The Federal Reserve’s war on inflation spurred it to raise interest rates from virtually zero to more than 5% between the spring of 2022 and last summer. The hikes fueled an increase in 30-year mortgage rates to more than 8% in October — a two-decade high.

The sharp rise in borrowing costs has effectively frozen the housing market. Sellers who’d locked in cheaper mortgages are loath to list their homes and lose their rock-bottom rates.

Meanwhile, prospective buyers are balking at paying top dollar for a worse home than they could have previously afforded, and taking on a much larger monthly mortgage payment than they’d hoped.

However, the Fed has signaled it’s done hiking and could start cutting rates within months, which has helped to lower mortgage rates to near 7%. Further declines promise to increase housing inventory, boost transaction volumes, and slow price growth.

“More supply this year is unlikely to cause outright price declines, just slower appreciation,” Fleming told Fortune.

Lower mortgage rates promise to boost demand, as buyers will be able to afford more expensive homes once again. It was “harder for homebuying power to keep up with home price appreciation last year,” he said.

That upward pressure on prices will be partly offset by sellers flocking into the market again, as the gap between their locked-in rate and prevailing rates shrinks, and slower appreciation discourages them from holding onto their homes, according to Fleming.

Business leaders have disagreed on whether house prices will keep rising or fall in the months ahead. Elon Musk, a vocal critic of the Fed’s rate hikes, predicted last year that home values would tumble like commercial real estate values have.

“Shark Tank” investor Barbara Corcoran disagreed, predicting they would pop by 15% or 20% once mortgage rates dropped to about 5%.

“The minute those interest rates come down, all hell’s gonna break loose and prices are gonna go through the roof,” she said.