December 19, 2023 – Is This the Turnaround?

Economic Commentary

We have had plenty of false starts during the past 18 months or so. Periods in which interest rates either paused or even dropped a little. The latest movement in the right direction seems to not only have lasted longer than most periods, but also has been accompanied by encouraging data on the inflation front. Rates have been dropping for a period of two months now, completely erasing the rise of the previous two months. Thus, we are asking this question – is this the turnaround we have been waiting for? 

If you listen to the rhetoric of Federal Reserve Governors, we are not out of the woods yet. But even the Fed’s language has been more moderate lately – as it should be. After all, on an annual basis, the Consumer Price Index peaked at 9.1% in June of 2022. In November of 2023, it was reported at 3.1% and still heading downward. Certainly, the composition of inflation has changed during this time. In 2021 it was energy prices and supply shortages in the headlines. Now the focus is on the cost of housing with a continued focus on wage gains. 

Certain market analysts are forecasting that the Fed could be lowering short-term rates as soon as early Spring and certainly if that happens, this would be further confirmation of the turn. Lower rates would be a welcome sign for the real estate market in 2024. Though, if you read most forecasts for 2024, they are expecting a moderate decrease in rates at best. Of course, economic prognosticators have been known to be wrong. Let’s hope they are not wrong about the lower rates, but they are welcomed to be wrong about the amount of the decreases expected. We would like a bit more of a descension.

Weekly Interest Rate Overview

The Markets. Rates continued to move downward in the past week, buoyed by favorable language in the Fed statement after their meeting which extended the pause in rate hikes. This week the survey moved below 7.0% for the first time in months, with more decreases seen after the survey was released.  For the week ending December 14, 30-year rates fell to 6.95% from 7.03% the week before. In addition, 15-year loans increased to 6.38%. A year ago, 30-year fixed rates averaged 6.31%, more than 0.5% lower than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “Potential homebuyers received welcome news this week as mortgage rates dropped below seven percent for the first time since August. Given inflation continues to decelerate and the Federal Reserve Board’s current expectations that they will lower the federal funds target rate next year, there will likely be a gradual thawing of the housing market in the new year.”  Note: Rates indicated do not include fees and points and are provided for evidence of trends only. They should not be used for comparison purposes.

Real Estate News

Lower mortgage rates and easing prices will help spark the beginning of an affordability turnaround in 2024, according to the Realtor.com® 2024 Housing Forecast. But the supply of existing homes will still be tight. Average mortgage rates will average 6.8%, with rates edging down over the year to reach 6.5% by the end of the year. Home prices will ease slightly, dropping by 1.7% after generally increasing since 2012, while rents will drop by 0.2%. There will be a 14% year-over-year drop in inventory, as existing homeowners with low mortgage rates stay put. Home sales are forecasted to hold steady, rising 0.1% year over year to 4.07 million. “Our 2024 housing forecast reveals the green shoots we’ve been waiting to see in the housing market and should give buyers some optimism after a grueling few years. Although mortgage rates are expected to ease throughout the course of the year, the continuation of high costs will mean that existing homeowners will continue to have a high threshold for deciding to move, but we will start to see some interest,” said Danielle Hale, chief economist for Realtor.com®. “Moves of necessity – for job changes, family situation changes, and downsizing to a more affordable market – are likely to drive home sales in 2024. Home buyers will continue to seek out markets where they feel like they get the most out of their dollar as they look for homes that better meet their needs.” Affordability will officially turn around in 2024. In 2024, the typical monthly purchase cost for the median priced home listing is expected to be slightly less than $2,200/month, or about 35% of the typical household income. That’s an improvement from 2023, when purchase costs ate up nearly 37% of income and the typical for-sale home cost $2,240. This tick up in affordability will give a foothold to some buyers trying to break into the market. Even more sellers will hang back, but they could get motivated if rates drop faster than forecasted. Despite the fact that builders have been catching up, the lack of excess capacity in housing has been obvious over the last few years. With home sales activity forecasted to continue at a relatively low pace, the number of unsold homes on the market is also expected to remain low. But if rates drop faster than expected (which is possible given the roughly half point decline seen in November 2023), this could lessen rate lock sooner and bring more homes to the market than forecasted. Source: NAR

In light of higher inflation than the 2% target rate the Federal Reserve desires, the highest mortgage rates in 20 years, heightened economic insecurity, high levels of secured and unsecured debt, and growing concerns about climate change, you might expect that achieving the American Dream of owning a home may be souring, but that is not the case. According to a recent survey from Falls & Co., a Cleveland-based real estate marketing and research firm, has found that 89.5% of millennials in their prime homebuying age (25-44) believe they can archive the American Dream of owning a home—while less than one percent said that owning a home was not important to them or financially possible. While answers to the survey varied across the board, the number one reason to own a home was emotional rather than rational. Sixty-three percent said they want to own a home just because they like the idea of owning a home. A further 44% want to own a home as an investment to build wealth over time. Big life events were also a key indicator of wanting to own a home; while numbers were not extravagant, 23% said getting married would be a reason to buy a home, and 20% said the birth of a child necessitated buying a home. So, what are millennials searching for? Primarily, 76% of millennials are searching for a detached single-family home, while 3.6% desired a condominium, 8.6% preferred an apartment, and only 3.7% desired (or could afford) to move into a mansion. Source: DS News

According to the Federal Housing Finance Agency’s (FHFA) Home Price Index (HPI) which compared home values between the third quarter of 2022 and the third quarter of 2023, the average U.S. home price gained a cool 5.5% in value year-over-year. In comparison, home prices rose 2.1% compared to the second quarter of 2023. The FHFA’s seasonally adjusted monthly index for September was up 0.6% from August. “U.S. house price growth continued to accelerate in the third quarter, appreciating more than in each of the previous four quarters,” said Dr. Anju Vajja, Principal Associate Director in FHFA’s Division of Research and Statistics. “House prices rose in the third quarter in all census divisions and are higher than one year ago, driven primarily by a low supply of homes for sale.” Nationally, the U.S. housing market has experienced positive annual appreciation each quarter since the start of 2012. House prices rose in 49 states between the third quarter of 2022 and the third quarter of 2023. Source: MReport