If you thought home prices were done going up, wait until mortgage rates start to follow the recent drop in interest rates in earnest. In this report, we will show why a drop in rates will cause more activity in the housing market and the net effect will most likely be even more demand for housing, an increase in sales, and continued higher prices.
The Logic
Something new is happening with interest rates, and it may be only the beginning of the move. The yield on the U.S. 10 Year is now 4.44%, down from 11% on 10/19/23, about three weeks ago.
Rates had moved up fast, from the lows of 2020 to the recent highs. The move was faster than at any other time in the past 50 years.
The U.S. 10 Year has broken the trend and should continue to decline. We see bond and mortgage rates continuing to decline, probably back near the 4% level. Yesterday, Reuters stated, “U.S. residential mortgage plunged last week by the most in nearly 16 months.”* Any kind of mortgage relief should bring buyers to the market.
The question that anyone considering buying or selling a home may want to know is, If rates decline, what will this mean for the housing market?
Before answering this question, we need to look at three current facts.
- HOUSING INVENTORY
Housing inventory has been weak for years.
Also, as we have discussed since April 2020, the U.S. housing market is and will be in a supply deficit situation for many years. Readers of the Real Estate Edge will recognize the table below, which shows Housing Starts since 1959. The average Housing Starts from 1959 to the start of the Housing debacle in 2007 was 1.547 million per year. The period from 2007 to 2020 created a running deficit of over 7.5 million homes. The huge inventory deficit from the Housing Crash has led to a continuing decrease in Housing Inventory.
2. ECONOMY
Labor has remained stubbornly strong throughout the Covid years and throughout the period when the FED has raised interest rates faster than any other period in the past half-century. The U.S. Unemployment rate is now 3.96%. This is at the low end of the range for the past 70 years. It is difficult to imagine that the economy will now fall apart when it has remained stalwart in the face of all these pressures.
3. HOME PRICES
Home Prices continue to climb in the U.S. After a historic increase of ___% from April 2020 to April 2022, Median Home Price in the U.S. was $396,000 in September, which was up 2.8% year over year. This was in the face of those historic rate increases.
In order to look at the possible Inventory, Sales, and Price effects on the housing market, it is helpful to consider how different players in the market would be affected by a decrease in rates. In the table below, we have divided the players in the housing market into 4 types:
- Downsizers – people who would like to sell their larger homes and buy a smaller home to lower their monthly housing costs. These people have held off selling at higher prices, because a smaller home would not save them much money due to increased mortgage rates. Now, with financing becoming more attractive, they may consider a sale.
EFFECT – since they are both buying and selling, the effect should be neutral.
- Upgraders – people who want or need a larger home for their family. These people have held off buying because higher rates made it prohibitive or because there was no supply.
EFFECT – since they are both buying and selling, the effect should be neutral.
- First-time buyers –mostly people in their 20s and 30s have been kept out of the market because of high prices, lack of supply, and, most recently, rates that made buying prohibitively expensive.
EFFECT – lower rates will entice some of these people to act. The act will mean buying and more demand.
- Second homeowners – these people have 2 or more homes. They are usually wealthier and less likely to use a mortgage.
EFFECT –although these people may be tempted to sell at high prices and lower rates may make it easier for some people to buy from them, it is hard to determine if there would be any net effect.
Jeff Marcus founded Turning Point Analytics (TPA) in 2009 after 25 years on trading desks and 13 years as a head trader to provide strategic and technical research to institutional clients. Turning Point Analytics (TPA) provides a unique strategy that works as an overlay to clients’ good fundamental analysis. After 10 years of serving only large institutions, TPA now offers its research services to mid and small managers, RIA’s, and wealthy sophisticated individuals looking for a way to increase their returns and outperform their peers.
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