Homebuyers have suffered some severe whiplash in recent months. After all, when mortgage rates hit 8% in late October, it was reasonable to think the housing market would stay on ice throughout the winter. The move cemented a narrative of negativity about poor affordability and homeowners with low-rate loans being unwilling to sell. Seven weeks later, mortgage rates are flirting with 7% and there are signs that inventories and sales are picking up.
It’s another example of how the US housing market continues to defy expectations with prices staying elevated in the face of an aggressive cycle of interest-rate increases from the Federal Reserve. Next year may well surprise again, though January should provide a window of opportunity for would-be homebuyers who have been shut out so far.
The argument for urgency is based on how the housing market is evolving in ways counter to some of the negative commentary out there. At a time when there’s a belief that having a low mortgage rate will cause homeowners never to sell, new listings of homes are up 6% year-over-year, according to real estate brokerage Redfin Corp.
Homeowners are more motivated to sell now than they were a year ago. Sure, tens of millions of them are locked into mortgage rates below 4%, if they have a home loan at all. But “the 5 Ds” that prompt people to move — diapers, diplomas, diamonds, divorce and death — happen regardless of where mortgage rates are. Many homeowners who have put off selling for 18 months are now looking to transact, pointing to a rise in housing inventory in 2024, regardless of whether mortgage rates are at 6% or 8%.
Similarly, mortgage purchase applications rose 15.7% in November as rates declined from the recent peak, suggesting buyers are responsive to falling borrowing costs even though affordability remains poor by historical standards. Granted, this increase is coming off the lowest levels in decades, but it shows that lower rates and more choices will draw buyers back into the market.
What does all this mean for those hunting for a new home?
Rising inventory levels will give buyers somewhat more options than they had earlier this year, while the recent decline in mortgage rates also makes affordability somewhat better. Despite this, buyers and sellers will be slow to adjust — many frustrated buyers exited the market completely when mortgage rates surged and sellers feel the pressure to cut prices to move their homes. This creates a window early next year for motivated buyers to work with accommodating sellers.
The outlook for prices is tricky. Redfin, which shares the view that listings will rise and mortgage rates will fall, put out their 2024 forecast this week with home prices expected to decline 1%. My view is that we won’t see prices move a whole lot in either direction barring a substantial change in mortgage rates. But with rate cuts from the Fed now in sight, we can’t rule out continued declines in mortgage rates — perhaps to 6.5% or lower — which would draw buyers back into the market and lead to bidding wars and fierce competition on the best homes.
Better to buy now to ensure you get the home you want, rather than get caught up in a feeding frenzy later. The goal should be to acquire the home you want, not sweat a price move of a few percentage points in either direction.
There’s an uncanny parallel here to how the housing market behaved this time last year. Mortgage rates peaked at then-unthinkable levels at the end of October 2022 before declining somewhat significantly in November. In response, mortgage purchase applications increased, suggesting buyers were responding to the decline in rates.
Then, in January, buyers came off the sidelines, making the first quarter of the year surprisingly strong, supporting prices and leading to record-low inventory levels. Those who were willing to transact managed to buy homes before inventories dwindled and got mortgage rates in the low 6s, or even lower if they bought new homes that came with rate buydowns.
And while affordability remains poor, the monthly mortgage payment on a median-price home has returned to where it was 18 months ago after the recent decline in borrowing costs. The median list price on homes has fallen to $425,000 from $459,000 in June 2022, a decline of 7.4%, according to Altos Research. Meanwhile, mortgage rates have increased to about 7% from about 6%. Someone buying a home with a 20% down payment and a 30-year mortgage would have a monthly payment of around $2,260 today compared with $2,200 back then, with average hourly earnings for workers up 6% over that time.
Buyers needing a home in 2024 who have been frustrated by their search so far should be prepared to pounce in January before the crowd catches on.
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