The sharp decline in mortgage
interest rates in December might have jumpstarted this year's spring housing
market ahead of schedule. Rates have dropped by about a full percentage point
since October, and consumers anticipate further reductions.
December saw a significant increase in optimism regarding mortgage rates, according to a monthly consumer survey by Fannie Mae. Mark Palim, Deputy Chief Economist at Fannie Mae, notes that, for the first time since the survey's initiation in 2010, more homeowners, on net, believe that rates will decrease rather than increase.
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| Ryan Paredes (R) and Ariadna Paredes look at a home being shown to them by Ryan Ratliff, a Real Estate Sales Associate with Re/Max Advance Realty, on April 20, 2023 in Cutler Bay, Florida. |
Palim attributes this notable shift in consumer expectations to the recent bond market rally. Homeowners and higher-income groups, in particular, expressed greater optimism about rates compared to renters.
The average rate on the 30-year
fixed has experienced fluctuations since the onset of the COVID-19 pandemic. It
hit numerous record lows in 2020 and 2021, dropping below 3% and triggering a
historic surge in homebuying and a sharp increase in prices. However, rates
more than doubled in 2022, reaching a more than 20-year high in October 2023 at
around 8%, before moderating back to below 7% in December. Despite the recent
decline, rates remain twice as high as they were three years ago.
Buyers are making a comeback, as
reported by Washington, D.C.-area real estate agent Paul Legere. Hosting two
open houses over the weekend for homes in the $1.1 million to $1.2 million
price range, Legere noted that they were the busiest he has experienced in the
past year.
He added that his co-worker shared a similar report, with both of them having over 10 groups of active shoppers even on a Saturday amid torrential rain. These were individuals who had previously been in the market, experienced a slowdown, or put their search on hold but are now earnestly resuming their quest for a new property.
Looking for inventory
Real estate agent Paul Legere
anticipates an increase in inventory in the next week or two, providing relief
in a market characterized by tight inventory and elevated prices. The limited
supply has presented a challenge for potential homebuyers.
Mark Palim, Deputy Chief Economist at Fannie Mae, notes that homeowners, citing high mortgage rates as a primary concern, may be encouraged to list their homes for sale with a more positive outlook on mortgage rates, potentially contributing to an increase in the supply of existing homes.
A report from Redfin indicates an
uptick in demand in December as mortgage rates declined. Redfin's Homebuyer
Demand Index, a seasonally adjusted measure of requests for tours and other
homebuying services, rose by 10% from the previous month to its highest level
since August. Although pending sales, measuring signed contracts on existing
homes, were down 3% from December 2022, it marked the smallest decline in two
years.
The trajectory of interest rates and home prices in the coming months will play a pivotal role. Continued price increases, driven by limited supply, may accelerate if rates continue to drop. Lower rates enhance affordability for potential homebuyers.
While further drops in mortgage
rates are expected, the extent will hinge on economic strength and inflation.
Matthew Graham, Chief Operating Officer of Mortgage News Daily, suggests that
the rate trajectory is tied to economic data. If economic conditions persist,
rates could potentially decrease into the 5% range, or even the high 4% range
if recession predictions for 2024 materialize. The average rate on the 30-year
fixed mortgage recently hit a low of 6.61% at the end of December, with a
slight increase to 6.76% in the current month, according to Mortgage News
Daily.
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