Mortgage Rates Fall, US Housing Prices Do Little, Why?
It isn't just US small cap stocks that could be enjoying a relative sunny moment: US mortgage rates are also falling.
This is raising excitement about the deeply frozen housing market from potential buyers desperately hoping to be able to find and afford a home and also those more broadly concerned that the US real estate market is, well, broken,
The fall in mortgage rates has been happening because investors have been buying US bonds in the expectation that interest rate cuts are coming in 2024.
This has worked! The yields of US bonds have fallen sharply.
In fact, the US 10 year bond has fallen from just over 5% to around 4.3% in the last month.
This has had an immediate and knock on effect on mortgage rates:
Average US 30 year mortgage rate have fallen by well over 0.8% since late October. Don't be fooled into thinking that 8% to 7% change is a small drop either. The recent 4-week drop in mortgage ranks as among largest in the past few decades.
The big question is obviously:
Fine, but will this bring more housing supply onto the market? Will the housing market become slightly less frozen?
The answer is almost certainly:
Yes but with significant caveats.
The first caveat is that, it will help with supply but only slightly. The reason is that people will hope that rates keep falling and so keep their home off the market in the expectation that 2024 will see interest rate cuts, not raises.
The second issue is, yes, more homes may come on the market but with employment still very strong and salaries rising for a lot of workers, house prices will also stay high. In fact the average house prices may increase strongly from here.
It is both striking and concerning that they were still rising even before rates came down.
We just got a data point this week when the S&P CoreLogic Case-Shiller National Home Price Index, which measures house prices across the nation, rose 3.9% from a year earlier in September. That September level was the highest since the index began in 1987 but it also came before the pause from the Federal Reserve and the subsequent fall in US interest rates.
So, house prices are still rising perhaps, as we have argued before, because rather than despite the frozen conditions,
Add it all up and houses are likely going to become slightly more affordable but only slightly so.
This is because there are two elements driving the lack of housing affordability:
House prices.
Mortgage rates.
Only one of the two is getting some relief and, as we have described above, there are some real drivers keeping
This isn't just our opinion either. Both the Atlanta Fed and the National Association of Realtors both produce home affordability indices that demonstrate just how little even a further fall in mortgage rates will influence prices.
Other than hoping for a recession - which seems less than ideal - the big hope for where we could be wrong might be simply that the current super elevated prices are propped up largely by the lack of supply.
In other words, if even slightly more supply comes on board, could that start to mean house prices fall?
It seems unlikely. You are betting against classic greed, the fact that people are anchored to the current price of their houses (after all, they pay taxes at that level) and the very problematic fact that if they chose not to list and sell, they still get to live there.
That is the benefit of home ownership. Unlike stocks or bonds or T bills you get to use the asset and better yet, make indelible memories in it. You may not be able to eat a home but you can have a very pleasant holiday season with family and friends and that very human and social fact, gathering around the hearth with loved ones, is worth remembering during this season.
This is also why people hold onto their homes even in weak markets. This is something to keep in mind if you are hoping against hope for a 2024 recession to bring the cheaper house prices.
We (still) need more homes.
*******
Have questions? Care to find out more? Feel free to Download our App (!!) or reach out at contact@pebble.finance or join our Slack community to meet more like-minded individuals and see what we are talking about today. All are welcome.
