Housing for 2nd Half of the Year

At the beginning of the year we put out a 2024 housing outlook that First Trust published.  In that report it talked about how unique 2023 was for housing but also an expectation for home sales to pick up in 2024 with expected lower interest rates.  Contrary to popular belief from 8 months ago, interest rates have NOT fallen so far in 2024 and therefore mortgage rates have remained elevated up until a small reduction over the past couple of weeks.  Where does that leave us for the rest of 2024?  Are we slowly starting to enter into a transitional phase with activity heating up?  Here are some key trends and items to keep an eye on for the rest of 2024.

Mortgage Interest Rates

When you talk residential housing these days, it’s tough to have any conversation without someone bringing up the incredibly high interest rates that buyers are faced with.  Sure, someone who owned a home in the 70’s and 80’s will invariably pipe into the conversation and offer a perspective that rates are “nothing compared to 40 years ago” but it does little to ease the pain.

Because the majority of the market now expects the fed to cut rates in their September meeting it’s important to understand the connection between the fed funds rate and mortgage rates.  Many people believe that when the federal reserve reduces the fed funds rate that it quickly leads to a reduction in mortgage rates and while that can be directionally true, many times mortgage rates will move BEFORE the fed cuts rates.  Mortgage rates are very closely linked to the 10 Year treasury rate on government debt and these rates are closely tied to investors FUTURE expectations on rates.  For that reason, you’ve seen mortgage rates come down quickly over the past few weeks with market volatility and the Fed has done NOTHING to the fed funds rate at this point in time.

Inventory Shortage

Despite more resale homes entering the market, the inventory shortage remains severe and likely will for some time, thanks to multiple headwinds.

For one, many homeowners remain “locked in” at ultra-low mortgage rates, unwilling to exchange for a higher rate in a high-priced housing market. Consequently, demand continues to outpace housing supply—and likely will for the remainder of 2024.

New home construction has provided some relief, with inventory at its highest since early 2008. However, more than this welcome supply is needed to fill the inventory gap.

Still, while inventory is some 33% lower than pre-pandemic averages, there is a bright spot in the data—current inventory levels sit at their smallest deficit since fall 2020, according to Zillow analysis. Inventory may improve further if home prices and mortgage rates stay high.

NAR Settlement coming in August

Following years of litigation, the National Association of Realtors (NAR) has agreed to pay $418 million to settle a series of high-profile antitrust lawsuits filed in 2019 on behalf of home sellers. The settlement received preliminary court approval in April. A judge is expected to grant final approval in November. Meanwhile, NAR announced that the new required practices will go into effect on August 17.

The required new rules prohibit broker compensation offers on multiple listing services (MLS), the private databases that allow local real estate brokers to publish and share information about residential property listings.

Moreover, sellers will no longer be responsible for paying buyer broker commissions—upending an accepted practice that has been in place for years—and real estate agents participating in the MLS must establish written representation agreements with buyers.

It remains to be seen exactly how this will play out because different states have operated under slightly different disclosures for some years, but the reality is that it will at least challenge the assumption that a seller will be required to front ~3% commission for BOTH the selling and buying agent (~6% total on average).  This could shift some burden onto buyers and therefore be another headwind on residential offers picking up steam.

Overall, I think the residential property space is in a much better position than its commercial counterpart.  I think we could see some slow increase in market activity and supply if mortgage rates drop 0.75% to 1% between now and the end of the year.