Inflation cooling down to the Federal Reserve’s target of two percent will spark a decline of borrowing costs, including for mortgages, the World Bank said on Tuesday. This development could help unlock a housing market in the U.S. that has been hit hard by expensive home loans and elevated prices.

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Since March 2022, the U.S. central bank has hiked interest rates at an aggressive pace not seen since the 1980s to a two-decade high of 5.25 to 5.5 percent current range. This has pushed up the cost of borrowing for mortgages to its most expensive in 20 years. That policy move was geared to help slow down inflation, which still sits above the Fed’s target of 2 percent.

But economists at the World Bank expect that inflation will moderate over the next two years and by the end of 2026 interest rates will come down along with it, which experts say will buoy the housing market.

“By the end of 2026, borrowing rates are expected to have declined substantially as inflation returns close to target,” the global financial institution said in a report.

House exterior, New York State, USA. Borrowing costs, including for home loans, in the U.S. are expected to fall “substantially” over the next two years.

Stock Photo/Jumping Rocks/UIG via Getty Images

High interest rates in the U.S. have tightened financial conditions in the world’s largest economy. But American consumers have powered through the restrictive environment helped by savings from the pandemic and contributed to economic growth that have defied expectations of a slowdown.

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The World Bank also revealed on Tuesday that U.S. economic growth will perform better in 2024 compared to an initial estimate earlier in the year. The economy is estimated to expand by 2.5 percent this year, nearly a percentage point increase from the earlier forecast of 1.6 percent.

“Data releases earlier this year surprised to the upside, particularly on the consumer spending side,” the World Bank said.

The U.S. is expected to continue growing in 2025 but at a slower pace of 1.8 percent as the effects of elevated rates continue to trickle down into the economy, slowing consumer spending along the way.

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“The slowdown in 2025 is expected to be driven primarily by the cumulative effects of past monetary tightening and a contractionary fiscal stance. Elevated real borrowing rates are set to restrain household spending on durable goods and residential investment,” the Bank said.

“Broader consumer spending is expected to slow due to moderating growth in household income as labor market tightness recedes and savings diminish,” it added.

The Bank’s expert suggested that household wealth will drop as house prices cool, adding to the overall ability of consumers to spend in the economy slow.

“Increases in house prices tapered off toward the end of 2023 and are expected to remain well below the strong pace seen over the past few years,” the Bank noted. “As wealth gains slow, household income growth is also expected to ease sequentially throughout 2024, with the labor market continuing to soften and U.S. job openings declining.”