U.S. home prices decreased during the third quarter compared with the second quarter but were up 2.1% compared with the third quarter of 2024, according to Clear Capital’s latest home price index report.
Regionally, and quarter-over-quarter, home prices increased 0.5% in the Northeast and 0.7% in the Midwest, but fell 0.8% in South and 1% in West.
Moving forward, mortgage interest rates, labor market conditions, and the fed ending its quantitative tightening will be major factors shaping the housing market.
“As expected, the Fed cut the Fed Funds rate by 25 basis points at the October FOMC meeting,” says analyst Brent Nyitray, in the report. “While inflation remains a touch above the Fed’s target of 2 percent, the feared tariff-driven spike has yet to materialize. Inflation has increased slightly in response to tariffs, not substantially. At the same time, we are seeing warning signs in the labor market — a slew of major layoff announcements, including recent major announcements from Amazon and UPS. Companies are no longer hoarding employees, and employees are now job-hugging when they were quiet quitting a year ago.”
As Nyitray explains, the government shutdown “has made the Fed’s job more difficult since there has been little to no economic data to guide policy.”
“The Fed is essentially flying blind,” he says. “Jerome Powell cautioned that a December rate cut was no sure thing given the data blackout. The Fed is reluctant to move too much without economic guideposts. Powell’s comment may well have been directed towards Donald Trump to urge him to re-open the government. Soon after the announcement, Trump advocated eliminating the filibuster, which would allow the Senate to pass a continuing resolution with 51 votes. Senate Republicans have little interest in removing the filibuster, so the shutdown will end when one of the two sides blinks.”
“Along with the rate decision, the Fed announced that it has reached the end of its quantitative tightening regime,” Nyitray says. “Since raising interest rates in 2022, the Fed has maintained a policy shrinking its balance sheet. During the era of quantitative easing, the Fed purchased trillions of dollars’ worth of treasuries and mortgage-backed securities (MBS). Quantitative tightening meant the Fed would let some of these bonds mature, which would drain the banking system of reserves which is intended to slow the economy and reduce inflation. The Fed is uninterested in returning to its pre-global financial crisis balance sheet of under a trillion in assets.”
“The Fed announced that it would continue to let its holdings of mortgage-backed securities run off, however it would stop the runoff of treasuries,” he says. “Any maturing mortgage-backed securities would be replaced with treasuries. What does this mean for mortgage rates? Ultimately, the end of quantitative tightening should mean lower long-term interest rates, which should translate into lower mortgage rates. This should not have much influence on MBS spreads (the difference between mortgage rates and long-term treasuries), which are another determinant of mortgage rates.”
So what does this mean for real estate prices? Does the Fed’s balance sheet affect home price appreciation?
“It appears so, at least in one direction,” Nyitray says. “The data indicates that quantitative easing pushed up home prices, however quantitative tightening has a much less dramatic effect.”
Photo: Dillon Kydd