Grab a beverage for this one. I dove in and broke down what’s happening with rates, home prices, and why 2024 could usher in a housing industry recovery.
Starting With Rates
Mortgage rates have gradually improved since late November as Core CPI inflation continued to improve from our 2022 peak of over 9% to our current report at 3.1% through October of this year.
Adding wind to the sails of recovery, the financial markets rallied earlier this month following no changes to the Federal Funds rate from the December meeting of the Federal Open Market Commission (The Fed) and the hint of three federal funds rate cuts in 2024.
Fingers crossed we’ve turned the corner setting a tempo for a gentle slide back toward 6% mortgage rates. An optimistic economic tone to ring in the new year. In a normal market, mortgage rates move with inflation and in anticipation of future market actions. We have not been in a “normal” market-controlled environment since the pandemic.
How Fast Will Rates Drop
The Federal Reserve’s role in the economic orchestra cannot be understated. Inflation data has been signaling mortgage rates should be getting lower for months, yet we haven’t had much downward movement until very recently.
Why? The actions from the Fed to control the financial markets have kept rates higher than market forces would dictate as a tool to push inflation back to that 2% target. Though mortgage rates aren’t directly tied to the Federal Funds rate, the Fed’s actions drive economic policies that impact all financial sectors. In the absence of Fed intervention, mortgage rates follow inflation and 10-year Treasury and MBS Yields.
The nominal change in mortgage rates is a clear indicator that Fed action is overshadowing market forces as all of the key financial indicators favor lower mortgage rates.
Monetary Policy Still Impacting Rates
Fed Chair Jerome Powell was clear in his intent to continue exercising restrictive monetary policy, quantitative tightening(QT). Translation, we are not in a market-controlled environment yet. Confidence the Fed is finished with what most see as over-managing inflation, is not resonating across financial markets just yet driving an ongoing level of uncertainty the MBS markets must plan and price for. That uncertainty is what will keep mortgage rates from a faster downward trajectory.
We are poised for rates to continue going down, but just how far and how fast is in the hands of policymakers, not market forces.
Home Prices
According to housing industry expert Dave Stevens, we have found a new floor in home prices erasing the prediction by many that what goes up must come down. His opinion is widely shared as home prices have stabilized in 2023 with a modest year-over-year gain of around 2.9% nationally.
Last year much of the West Coast, Oregon included was “at risk” for being overvalued by as much as 15%. Home values for Oregon held on up 1% to 3% year-over-year in line with the national average. Our coastal neighbors, Washington and California also saw positive increases at 1% to 3% and 3% to 5% respectively based on CoreLogic Home Price Increase Data through early December.
Housing Supply
The wild card in home price stability remains supply as can be seen in the chart below. The U.S. housing market will close out 2023 with an unresolved shortfall estimated at 1.6 million homes as measured by current and future demand.
Activity is picking up with housing starts hitting a 2023 high, exceeding 1.5 million single family home starts through November, an increase of 14.8% from October. As a region, the West ranks second behind the South for new home permits through September of this year. A rate cut by the Fed could help push that trend easing some pressure on commercial lending sources many of whom home builders rely on for financing.
A Wave of Buyers
For the past five weeks mortgage applications have steadily increased signaling buyers are preparing to take advantage of recent mortgage rate decreases ahead of the busy Spring home buying season. It is a savvy strategy with supply still well below current and forecast demand as seen above.
Higher rates kept demand in check during 2023 but 2024 is projected to mark a recovery with a wave of First-Time Home Buyers (FTHB) numbering in the millions ready to re-engage after temporarily being priced out. The news that home ownership builds wealth resonates by the age of 29 as is evidenced by the peak of the green line representing FTHBs’ buying actions on the chart below.
Homeownership Builds Wealth
Home appreciation numbers are a little skewed from 2020 to 2023 but even in a quiet year, real estate offers safe haven for equity to grow. Viewed as a form of forced savings accessible in the future with a home equity line of credit, real estate has proven to be timeless as a tool to build wealth. If you’re not a homeowner yet, the chart below is your wake-up call to evaluate options to make a home a reality.
If you’re a homeowner you are likely sitting on some equity that could be used for home improvements or to pay off higher-cost debt. Cash-out refinances are again becoming attractive and can often provide payback in as little as two years when removing higher interest obligations eating away at monthly cash flow.
The Infamous Housing Bubble
The topic of housing wealth can trigger the memory of the dreaded housing bubble, but I prefer to wrap some facts rather than fear around home ownership. The Great Recession from 2007 to 2011 looms large with 5 consecutive years of home value erosion, but let’s put that in perspective.
The single-digit drops in home prices of -4% to -5% covered four of the 5 years with 2008 recording the highest decline in recorded history at -12%. Only one other year, 1990, since we began tracking this housing data in 1942 did we experience a drop, and it amounted to -1%. If you owned property during these downturns and did not sell, you’ve experienced a full recovery and some of the largest gains in home appreciation in history.
What other asset can you borrow against with no negative impact on its appreciating value?
The Takeaways
- Market confidence is building, lowering mortgage rates with hints of Fed Fund rate cuts in 2024
- Mortgage rates (among other things) are still being managed by the Fed through quantitative tightening
- Home prices have found a new floor as evidenced by little movement up or down for the majority of 2023
- A continued shortfall in supply will make for an interesting Spring season as mortgage rates creep down
- Recession still rumbles in the background – the impact could help rates but challenge home sales
- Buying a home remains a top priority for FTHBs with a focus on affordability solutions
- Homeownership remains a primary source of wealth building in this country
What’s Ahead
The rate drop will be gentle as we still have opposing forces at work governing our rate environment. Predictions range from 30-year fixed-rate mortgages near 6% by the Spring of 2024, to Moody Analytics chief economist Mark Zandi’s longer horizon of 6% rates by late in 2024.
Pent-up demand from buyers priced out of the market is poised to collide with lower mortgage rates in late Spring. Builder activity hit an annual high through November and mortgage applications are on the rise nationwide, hopefully marking a path to recovery for our housing industry.
Not All Pre-Approvals are Created Equal
Get pre-approved early with a fully underwritten Fairway pre-approval valid for 90 days and easily updated to accommodate your home shopping timeframe. Seller’s agents love to see our logo on your letter as they know they can trust we’ve done the homework, and you are fully qualified to close on a home loan. If you haven’t checked out my behind-the-scenes article highlighting the unclear definition of a pre-approval and why fully documented, underwritten pre-approvals are so important find it here.
Reintroducing the Term Refinance
I always encourage my clients to start early if a refinance or purchase is on their wish list. I live rates all day every day and watch all the indicators to help guide you in timing and best-fit loan programs for the moment. Refinance activity is picking up as homeowners put their home equity to work for remodeling updates and paying off higher interest debts.
Written by Sheila Landis-Edits by Steve Landis
