New Real Estate Market Update

Mortgage rates have crept their way back above 7% with hotter-than-expected economic readings, resulting in a slowdown in purchase activity.

The 7% mortgage rate is a psychological barrier to the housing market.

Airline travel is particularly sensitive to airfare pricing. There are so many online choices to compare fares easily. Travelers quickly jump for more affordable options, even if it means changing traveling dates, accepting layovers, or flying on a red-eye. When airfares spike, many travelers alter or scrap their travel plans altogether. Yet, if fares unexpectedly drop, demand soars, and flights are booked seemingly overnight. The price sensitivity of airline consumers makes it tricky for airlines to fill planes and still earn a profit. 

Similarly, prospective buyers are very sensitive to how much their monthly payment will be, which is determined by the prevailing mortgage rate. Home values skyrocketed higher as mortgage rates plunged to record lows from 2020 through the first few months of 2022. That changed as mortgage rates soared from 3.25% at the start of 2022 to 7.37% by October. In 2023, rates climbed from 5.99% in February to 8% in October. They remained above 7% from the end of July 2023 through mid-December. Despite a limited supply, values do not change much when rates climb above 7%. The combination of elevated home prices and the high mortgage rate environment has resulted in an exceptionally rate-sensitive housing market.

The Federal Reserve set out on a course to bring down inflation, which had spiked to 9% by June 2022. Inflation has been an international problem linked to disruptions in the global supply chain and considerable shifts in demand due to the COVID-19 pandemic. The Consumer Price Index has dropped to 3.1% but has a ways to go to hit the Federal Reserve’s 2% target. The Federal Reserve has indicated that they will most likely drop the short-term Federal Funds Rate three times this year. Still, they are very data dependent, meaning they watch every U.S. economic data point, from the number of job openings to consumption to many monthly inflation indicators.

In December, right after indicating that they would be cutting rates in 2024, rates plunged from 7.09% to 6.62%, its lowest rate in seven months. Since then, a series of economic reports suggest that the economy has not entirely cooled enough for the Fed to start its cuts. Many anticipated the cuts to begin as early as March, but now it looks more like June. This change resulted in rates climbing to 7.1%, according to Mortgage News Daily.

Demand is currently at 3,491 pending sales compared to 3,763 last year, 272 fewer. The only real difference is that mortgage rates migrated back up to 7%. In February 2023, mortgage rates averaged 6.6% versus 7.0% so far this February.

 As mortgage rates migrate higher, demand slows, and the market speed slows. Rising rates are like removing pressure on the housing market gas pedal. As the economy cools, which is projected to happen sometime this year, rates will fall, and the Fed will start slashing the short-term Federal Funds rate. Home affordability will improve as rates migrate downward. As mortgage rates drop, demand improves, and the speed of the market accelerates (multiple offers over asking). The lower rates fall, the more pressure is placed on the housing market gas pedal, and the hotter the housing market will become.

Higher rates dampen housing activity. It not only impacts demand, but it also affects the number of homeowners willing to sell. An astonishing 85% of all homeowners with a mortgage have a rate at or below 5%. Many have rates far below that threshold. Nearly a third, 30%, have a mortgage at or below 3%. Higher rates cut into affordability, and fewer homeowners are willing to part with their low fixed-rate payments in exchange for a much higher mortgage rate and payment. In 2023, 33% fewer Los Angeles County homeowners were willing to sell their homes compared to the 3-year average before COVID (2017 to 2019), a mindboggling 30,469 fewer FOR-SALE signs.

When mortgage rates migrate lower, not only will demand rise, but the number of homeowners willing to sell will rise. The closer rates dive toward 6%, the more inclined homeowners will be to list their homes.

The Southern California housing market is particularly rate-sensitive. As rates slowly migrate higher, the market cools, limiting supply and demand. When rates eventually fall, demand will rise, more homeowners will sell, the housing market will speed up, and there will be a noticeable increase in closed sales.

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