Record Drop in Mortgage Rates

If rates can slip into the high-5s by next month, the early-2024 market will be on fire….

Survey-based rate indices haven’t yet had time to account for the massive drop in mortgage rates this week, but rest assured, it was special.  That’s no surprise if you saw our coverage yesterday, which pointed out that it was the biggest drop in a 45 day window that we’ve ever measured.

When rates drop that much, that quickly, there’s always some risk that we’ll see a corrective bounce.  Sometimes such corrections only erase a small amount of the improvement over a day or two.  Other times they can be the start of weeks of gradual increases.  Either way, we usually have some indication of that resistance within a few days of the final crescendo.

This time, however, the mortgage rate drop is sticking the landing.  Wednesday and Thursday were the big movement days and now today has seen almost no movement at all.  The average lender is effectively right in line with yesterday afternoon’s latest levels.

While this turn of events can’t predict the future, it is a more reassuring set-up for the days and weeks ahead.  Speaking of weeks, we probably won’t know what the next leg of this journey truly looks like until the 2nd week of January after the next Consumer Price Index (CPI) comes out.

https://www.mortgagenewsdaily.com/markets/mortgage-rates-12152023

Predicting The 2024 Real Estate Market

Yesterday, Jay Powell shocked the world by declaring three rate cuts in 2024! It was Fed speak of the most unusual order – open and transparent, instead of the opaque mumbling of previous chairmen.

The predictions are for rate cuts early in 2024 too. The CNBC survey showed a 90% probability of a rate cut at the Fed’s March meeting, and 100% chance at the May meeting. This Fedwatch Tool below thinks they will all be in the first half of 2024:

What does it mean for the 2024 Spring Selling Season?

Real estate prognostications are usually wild guesses without any supporting data. But next year looks more predictable than ever – and we’ll be able to track it closely.

Let’s consider how 2023 played out:

In June, I mentioned that 2023 got off to a very fast start, and that March would have the highest sales count of the year – which means buyers and sellers were active in January and February!

We had a mid-summer surge too, and the August sales beat out those in March by a nose.

Because the price points are so much higher these days, every property is a luxury home that appeals to the affluent. It means the homes for sale need to be spruced up more than ever, which takes planning and preparation for weeks and months.

We already know that our team will be listing homes for sale on January 18th and 25th, and there should be many more others doing the same. With the 2023 inventory being so bleak, the pent-up buyers will be noting the lower mortgage rates and be on the prowl early.

We will do our annual January inventory contest to give everyone a feel for how the number of homes for sale is breaking early in 2024. Between the number of January listings and the results of our listings, you’ll have quality data on how the 2024 market is unfolding!

My guess is that there will be 10% more listings in January, and combining that with lower mortgage rates could set off a mini-frenzy!

Pricing was steady this year, and it should bump around by the same +/-5% in 2024. It’s probably not worth it to try to predict your purchase or sale by the price history – it will bounce around just because the metric is flawed.

Rate Buydowns

People might think that 8% mortgage rates will kill the real estate market, but they are one more thing that can be fixed with money.

Two popular strategies to lower the mortgage rate:

30-year fixed rate buydown: Paying one point, or 1% of the loan amount will lower the rate by 1/4%. It would take a few points paid to make a significant difference, and the home seller can contribute too. On a $2,000,000 purchase with 25% down and a loan amount of $1,500,000, the monthly payment is $11,006 at the 8% rate. But the payment can be permanently reduced to $9,358 per month (6.375%) by paying six points, for a savings of $1,648 per month! Hopefully the seller will contribute some or all of the fee.

2-1 temporary rate buydown: Paying 2.4 points will lower the mortgage rate by 2% in the first year, and then by 1% in the second year. With the same $1,500,000 loan, here’s how the 2-1 buydown looks:

In both of those examples, you have a fixed-rate 30-year mortgage. If you are more of a gambler and don’t want to pay any points, the other alternative is to get the 3/1 ARM that has a fixed rate of 6.25% for three years, and then the rate adjusts annually for the remaining 27 years.

Or you can buy a Toll Brothers home:

A side note on Toll Brothers. Their Del Mar Mesa tract where construction was getting underway? They did sell all of those homes.

Eighterater

How are those expert opinions doing?

Doug Duncan, chief economist at Fannie Mae, was acknowledged as the best forecaster in America last year when he was honored with the Lawrence R. Klein Award for Blue Chip Forecast Accuracy, one of the best-known and longest-standing achievements in economic forecasting.

The winner is selected based on the accuracy of forecasts published in the Blue Chip Economic Indicators newsletter, compiled and edited by Haver Analytics, Inc. “It is a real honor for the Fannie Mae forecast team to be recognized with the Lawrence R. Klein Award,” said Duncan.

“The award is based on the smallest average error for GDP, CPI, and unemployment over the past four years,” says Professor of Economics Dennis Hoffman, director of the Office of the University Economist at ASU. “I commend Doug Duncan and his team at Fannie Mae for their remarkable predictions during a period of extensive market fluctuation and instability.”

He predicted we’d be at 4.4% today – the reality:

 

Rates at 23-Year Highs

The Fed paused alright – Jerome just talks up the rates now!

Rates moved only moderately higher on Wednesday after the Fed rocked the bond market with its updated rate forecasts.  To reiterate yesterday’s analysis, it’s not that the market is expecting the Fed to be accurate in those forecasts.  Rather, the forecasts help investors understand how the Fed’s approach will be calibrated going forward.

In simpler terms, the Fed doesn’t think rates are too high right now.  If anything, they might need to go higher.  Moreover, they won’t go lower until economic data really starts to deteriorate in a compelling way.

Unfortunately, this morning’s most relevant economic report didn’t deteriorate at all (weekly jobless claims were 201k versus a median forecast of 225k).  Actually, it’s fortunate for the economy, but unfortunate for interest rates.

Between the data and the overnight momentum in overseas markets, bonds are at their weakest levels in years.  Mortgage-backed securities (the bonds that dictate mortgage rates) didn’t swoon quite as much as Treasuries, but as of today, it was just enough to push the average mortgage lender almost perfectly back in line with the highest 30yr fixed rate of the past 23 years.

https://www.mortgagenewsdaily.com/markets/mortgage-rates-09212023

Need a reason to sell now, instead of waiting for next year? It doesn’t matter what you think of Peter or the content. It’s how many people who read this in the first half-day that matters – and this kind of doom spreads like wildfire:

Rates On The Rise

Mortgage rates will be surging after the jobs report today, and you might wonder about the impact.

The Fed doesn’t meet again until the last week of July, and, by then, it will be certain that they will bump another quarter or half-percent. It probably means that we will have mortgage rates well into the 7s for the rest of the year.

What is coming is The Big Stallout. It will just be too easy for buyers AND sellers to wait until next year.

Is there really that much difference between a rate of 6.75% and 7.25%? Well, yeah kind of. On a $1,500,000 mortgage, the difference is $504 per month.

But it has more to do with the calendar. Buyers have been searching for 1-3 months now, and at this stage, they are looking for any reason NOT to buy and wait instead. Most of the deliberate sellers who planned their 2023 move with precision have put their home on the open market by July, so the inventory over the last 4-5 months of 2023 will probably be VERY lean – which causes buyers to disengage.

Home sellers and listing agents will have to be doing it better than ever to find success!

Forever Homes

The experts say that the majority of homeowners are locked into their homes by their low mortgage rate, and if/when today’s high rates come down, then the inventory of homes for sale will bounce back.

Boy, are they going to be disappointed.

For the last 10-12 years, San Diegans have been buying their ‘forever home’, whether they knew it or not. They are locked into their home all right, and their low rate is only one of the reasons – with two other facts being more of a burden:

  1. Difficulty of finding a better home at a reasonable price.
  2. Capital-gains taxes in the six figures.
  3. Ultra-low mortgage rate.

If mortgage rates magically came back to the 3% to 4% range, would it make sellers shrug off the first two? If rates came down to the 2% to 3% range? They would still need a very good reason to move, and endure the first two problems.

The low-inventory environment is here to stay.

Fed Chair Powell and Real Estate

Powell’s goal was to crush the real estate market…..

In June 2022, Powell told reporters that spiked mortgage rates would help to “reset” the U.S. housing market, and that “we need to get back to a place where supply and demand are back together and where inflation is down low again, and mortgage rates are low again.”

Then in September 2022, Powell told reporters that we had officially entered into a “difficult correction” that would restore “balance” to the housing market. At the end of November 2022, Powell went a step further, and said a “housing bubble” had formed during the Pandemic Housing Boom.

Last week, Powell said, “The housing market is bottoming and may already be improving.” He made the comment after the central bank kept benchmark rates steady but indicated more hikes may be needed later this year.

“Activity in the housing sector remains weak, largely reflecting higher mortgage rates,” Powell told reporters after the rate announcement. “Certainly, housing is very interest rate-sensitive, and it’s the first place, really, or one of the first places, that’s either helped by lower rates or is held back by higher rates. And we certainly saw that over the course of the last year. We now see housing putting in a bottom and maybe moving up a little bit. We’re watching that situation carefully.”

In his prepared statement yesterday, he said, “Although growth in consumer spending has picked up this year, activity in the housing sector remains weak, largely reflecting higher mortgage rates.”

Then he said,“We think housing inflation will be coming down significantly over the course of the rest of this year and next year. Consumer inflation has eased since last summer due mainly to falling energy and core good prices. In contrast, rents and other housing inflation has been moving higher.”

What he doesn’t see…..

Powell’s comments get turned into headlines, like this:

Potential home sellers take one glance and – even though they aren’t quite sure what he means – they decide the market is no good and that it’s smarter for them to wait for better times. It would take a flood of supply to effectively reset the real estate market, yet his policy is doing the opposite. Plus, his higher rates are pricing out the marginal buyers (the regular people), which creates less competition for those who can withstand higher rates – the affluent buyers.

The end result is affluent people chasing the few sellers who really need to move – just the type of buyer who can, and will, pay more to get what they want now….which will help to keep prices elevated.

What’s likely to happen:

The off-season will commence shortly and there will be fewer sales than ever, with an occasional deal here and there. The trendline will look softer than during the selling season, which will cause Powell and others to abandon the bottom talk and instead declare that their ‘housing inflation’ – code for rising prices – is coming down. Everyone will take it as a sign that the recession is finally here!

Then the 2024 selling season will get rolling in February, confounding the experts even more.

It might take a couple more years before they start believing that home sales are seasonal – if they ever do.

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