Rates Below 5% Again?

After July’s momentary celebration of 5% interest rates, August ended the month at 6%. September finished just having crossed 7%. Only a few months ago, 6.25% seemed like a ceiling as the U.S. continued its strong stance against a slowing global economy. That didn’t last as we saw European economies bear the brunt of Russia’s war on Ukraine, Japan struggling with lower global demand for manufactured goods, and China’s economic troubles thanks to its zero-Covid policy. All of these strengthened the dollar while creating incredible volatility of our mortgage bonds.

This is why half of your friends are in Switzerland or Italy right now.

Meanwhile, the fight here in the United States is the fight against inflation. For the last few years, we have seen too many dollars chasing too few goods, pushing the price of those goods up as demand spiked. The Federal Reserve’s job now is to constrain the dollars spent. Think about this: 28% of all goods purchased are done with a credit card. That doesn’t even include car loans, home loans, business loans, etc. Buying on credit creates money, future money pulled forward, giving you access to a product or service today for payment in the future. For the Fed to control spending, they must make the cost to borrow higher, so it creates more pain. At the same time, the benefit of saving has also gone up. As the Fed raises their rate, or overnight rate, so goes the 1-year treasury, the safest of all investments as it’s backed by the federal government. This rate is 4.01% today, which is significantly higher than the long-term average of 2.85% and will increase further after the November 2 Fed rate hike.

Want a safe investment return? Here’s my tip for the day:  buy 1-year treasuries.

This rise in the Fed rate is creating demand destruction. Lower demand for goods creates supply surplus, and when stores have too much product, goods go on sale. This will eventually lower inflation as prices go down. First, we must go through this destruction.

We are seeing this play out in housing. While some homes and some neighborhoods are still seeing homes go for over asking or in only a few days, most of the market slowed as we saw rates cross 5.5% and certainly came to a halt when they topped 7%. This plays out most clearly in pending home sales dropping 15.4% month-over-month and 28% year-over-year. Seasonally, pending home sales would drop but higher rates are dropping them faster. We also saw median days on the market jump from an unhealthy 5 days last year to a more sustainable 16 days. This equated to a 220% increase.

Yes, small numbers create fantastically dramatic percentages.

September also saw more sellers at higher home prices coming on the market as higher-priced buyers are seemingly less rate-sensitive. What was not expected was the push on rates above 7%, leaving more of those homes on the market as the month turned over. Active listings ended September up 10.7% from August, up 93.5% from September 2021, up 45% from 2020, yet still down 17% from 2019.

Less demand and more supply always result in lower prices. That’s ECON 101. Our close-to-list dropped from 99.4% in August to 98.9% in September, with detached homes feeling this a little more as buyers negotiated a 98.7% close-to-list. This slowed our average home price growth to 8.4% year-over-year and our median price growth to 9.4%. Compare this to the median home sold in March, up a whopping 21%. Buyers will look at this as opportunity. Home prices are dropping. Sellers will look at this as lost value when compared to their neighbors. Ultimately, it’s a correction. It’s the housing correction Powell needed. The loss for most people is simply unrealized gains as home prices simply cannot go up 21% without harming the market.

2021 finished the year with a 16.7% increase in the average close price in the DMAR 11-county area. That is the highest on record. Prior to 2020, the 30-year average increase had been 6%. This month’s slowdown gives us a year-to-date average close price up 12.8%. With the fourth quarter seasonal slowdown and higher mortgage rates, I would expect 2022 to end in the high single digits which is still an incredible return on a home investment.

Less demand, more supply, and lower prices will bring lower inflation. Lower inflation will bring the housing market lower interest rates. But when? This could start to happen as soon as this month as the year-over-year comparison to last October through January will be seemingly lower. This means monthly inflation was hot last fall. This year’s numbers, as they are cooling off with released supply chain issues, will now be compared to higher numbers last year making the year-over-year comparisons smaller.

We are also seeing the continued slowdown in our economic reports as construction spending, ISM manufacturing and consumer spending all slow. This slowdown, although arguably not recessionary yet, could drop into a recession should the Fed continue its exacerbated push on the Fed rate, creating a loss of employment. This looks most likely to happen in the spring. Recessions historically bring lower mortgage rates as the investment in longer-term bonds is more appealing, pushing prices up and yields down.

Watch inventory levels as we finish this year. It will guide us as to how much any increase in demand with lower rates will stress our market. I believe rates could have a volatile sideways movement for the rest of this year, dropping back into the 5’s, some even predict 4’s, come late spring or early summer. This will keep our home prices from going negative and allow us to stabilize back to our “normal” 6% average price growth Denver has come to rely on.

Until next time, that’s a wrap for this month’s Market Trends update. It’s my pleasure to keep you updated,

It’s my pleasure to keep you updated.

Nicole Rueth
Producing Branch Manager with The Rueth Team of OneTrust Home Loans