Affordability tops the talk surrounding housing so thought I’d give you a recap of the multiple forecasts by numerous experts on home prices, mortgage rates, and most importantly, timing.
Adding wind to the sails of recovery, the financial markets rallied at year-end with a unanimous vote by The Federal Open Market Committee (FOMC) to leave the Fed Funds rate unchanged in their December meeting and hinted at 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!
January Optimism
The Producer Price Index (PPI) fell in December, the Consumer Price Index Core reading just in at 1.8% against an expected 2%, and Core inflation at 3.9% breaking below 4% for the first time since May of 2021, closed our second week of the new year with positive indicators for lower mortgage rates.
We are now anxiously awaiting the January 26 report on Personal Consumption Expenditure(PCE). Here’s hoping it reflects the same trend bolstering support for a Fed Funds rate cut and fueling our housing industry recovery.
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 before the declines of late 2023.
However, Fed Chair Jerome Powell was clear in his intent to continue exercising restrictive monetary policy-quantitative tightening(QT)-back in December. 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 combined with ongoing QT keeps 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.
Define Normal
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 and the events of 2008, stifling the ability of even the most seasoned economist to make an accurate forecast. Last year offered up bank failures, national debt challenges, and new international uncertainty with wars and potential supply chain challenges.
Throw in a Fed hyper-focused on 2% inflation AND reducing the almost $8.5 trillion accumulated debt of which mortgage-backed securities comprise roughly $2.4 trillion from the financial crisis of a decade ago and the pandemic, and it’s clear why the term “forecast” has been revised to “best guess”.
I’m still here to wave the flag of optimism the housing market is headed into recovery and share my insights into the current market and “best guess” of what’s ahead.
Forecast aka Best Guess on Fed Cuts
Annual forecasts from the Mortgage Bankers Association, Moody’s Analytics, MBS Highway, and HousingWire all agree March holds the highest probability, upwards of 70% depending on the source, for a Fed rate cut.
Pictured below is a data summary from industry expert Barry Habib founder of MBS Highway recapping the odds by month of a Federal Funds rate cut. He backed into these estimates by looking at key indicator trends like shelter costs. As the 2024 lower numbers displace 2023 data, PCE moves well under 3% and much closer to the Fed 2% target.
Historically the Fed cuts rates ahead of actually attaining their target. A full explanation by Barry can be found here, though the data below has been updated by him since this interview took place. That speaks to the continued volatility and takes us back to a “best guess” forecast.
Re-Introducing 6%
Mortgage rates dwelling under 5% for the years following the financial crisis of 2008 supported the struggle to move the home inventory bulge of 2009 (4M homes on the market then, 1M currently) and jumpstart the devasted industry. Fast forward to post-pandemic home prices and an inventory shortfall and it becomes clear why stimulating housing demand with sub-5 % rates would exacerbate home affordability challenges and create an opening for inflation to re-appear.
Instead, mortgage rates are cautiously moving down as we still have opposing forces at work governing our rate environment. Just how low will we go this year? Predictions range from 30-year fixed-rate mortgages near 6% by the Spring to Moody Analytics chief economist Mark Zandi’s longer horizon of 6% rates closer to the end of this year. MBS Highway’s Barry Habib believes if the Fed begins tapering QT early in the second half, we could see 5.5% by year-end.
One thing they all agree on, their forecasts were far too optimistic last year and note the highly volatile non-market driven environment makes all forecasts for the near future, best guesses.
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. The U.S. housing market continues to run at a 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 2023. 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
Mortgage applications steadily increased starting in October and continue that trend with a 9.9% increase through the first week of this year signaling buyers’ acceptance of current rates. Home purchases due to job changes and people moving continued in 2023, but we missed much of the First Time Home Buyer traffic and those with no sense of urgency to make a change. That trend could be about to change.
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. Buying a home begins to resonate by the age of 29 as is evidenced by the peak of the green line representing FTHBs’ buying actions on the chart below.
Mortgage Solutions for Today’s Market
What’s working in today’s market is a topic in of itself, but we continue to create affordability with rate buy downs, seller-paid concessions versus home price reductions, first-time home buyer gifted downpayment and non-occupant co-borrower programs as well as favorable terms for FHA programs with last year’s premium reduction in mandatory mortgage insurance.
House flippers took a sideline to home renovation loan buyers in 2023 and we anticipate more homes previously targeted by flippers will become projects for first-time home buyers using home renovation loans to accommodate financing repairs into a primary mortgage payment.
The Takeaways
- Market confidence is building, lowering mortgage rates with hints of Fed Fund rate cuts as early as March
- 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
- International instability could dampen the pace of recovery
What’s Ahead
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 of 2023 and mortgage applications continue strong in the new year. Two pieces of advice for home shoppers:
- Get fully pre-approved early as it offers time to fix any “surprises” in qualifying ensuring the best pricing and a smooth process. All pre-approvals are valid for 90 days and can be quickly updated should the homebuying process span into a longer timeframe.
- Interview your lender to understand your options. The question isn’t what’s your rate – no one can accurately quote that prior to underwriting. The questions are what loan programs do you offer to fulfill xxx requirements and is this the rate and fee structure I will close with or just an estimate? (estimates are often teaser rates, many requiring as much as 40% down in addition to discount points to qualify)
