With the continuous decline in mortgage rates since August, the real estate report for September finally brought some good news with a year-on-year increase of 3.5%! Not only buyers are entering the market, but sellers are also witnessing the market’s heat and are more willing to sell their homes. Meanwhile, as the Federal Reserve started to cut rates in September, just when everyone thought mortgage rates would further decrease, it did not happen. Especially at the beginning of October, the 30-year rates suddenly jumped up, even reaching 7%! In this edition, we will explore the U.S. real estate market and what may happen in the coming months.
In mid-September, the Federal Reserve cut rates by 50 basis points, which was seen as good news for homebuyers as it was generally expected that the decrease in the federal funds rate would help push down mortgage rates. However, the opposite happened!
Since the Fed rate cut, the average 30-year fixed mortgage rates have started to rise instead of falling. According to data from Mortgage News Daily, after the Fed rate cut, the average 30-year fixed mortgage rate went from 6.15% to a slow rise, and after the September employment report was released on October 4, the mortgage rate on that day jumped from 6.26% to 6.53%, and by October 11, it rose again to 6.64%.
So, what happened in the September employment report? In fact, 254,000 job opportunities were created in September, and the unemployment rate decreased by 17 basis points, dropping from 4.22% to 4.05%. These figures exceeded expectations – only about 150,000 job opportunities were anticipated, and the unemployment rate was expected to remain at 4.2%. This means that the number of jobs created in September exceeded the 3-month moving average job creation rate for the past six months, indicating that employment has been higher than the average monthly employment over the past half year in 3-month groupings and has pushed up recent averages.
Although there is still a significant gap in job opportunities compared to two years ago, consumer spending in the U.S. remains stable, and corporate profit reports are strong. Despite a slight economic slowdown in the high-interest rate era, there seems to be minimal risk of a recession at present. Importantly, there is still no reason to worry about a resurgence of inflation, and this report likely increases the likelihood of a soft landing.
Additionally, on October 10, inflation data for September was released, showing that the Consumer Price Index (CPI) rose by 0.2% monthly and 2.4% annually, excluding the volatile food and energy categories. Core CPI, excluding food and energy, rose by 0.3% monthly and 3.3% annually, slightly higher than the expected 0.2% monthly and 3.2% annual increases.
Most of the inflation increase came from a 0.4% rise in food prices and a 0.2% increase in housing costs, offsetting the 1.9% drop in energy prices.
While the data is slightly higher than expected, experts predict that the Fed’s meeting on November 7 is likely to cut rates by another 25 basis points. However, a lot will depend on the job data released on November 1. If employment remains strong, the pace of rate cuts may slow further. But if employment shows signs of weakness or there is a higher number of applications for unemployment benefits, there will be more reason to accelerate rate cuts.
There is more evidence showing that the U.S. economy is stronger than expected, which will lead to higher rates. After the September employment data release, the possibility of an economic recession seems more remote, leading the Fed to slowly ease monetary policy. Therefore, short-term interest rates are unlikely to decrease significantly.
However, it is important to note that there are still risks in the job market. Data released on October 10 showed that as of the week ending on October 5, there were 258,000 initial jobless claims, the highest total since August 5, 2023, an increase of 33,000 from the previous week and far exceeding the predicted 230,000 initial claims. This could be attributed to recent hurricanes and strikes, but if the situation does not improve, it indicates that the job market may not be as optimistic as previously thought. In other words, this could create room for lowering interest rates.
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What the U.S. real estate market urgently needs now is a reduction in mortgage rates. It is apparent that the rate cut since August has injected vitality into the housing market, with residential contract signings in September increasing by 3.5% on a yearly basis. While this may seem modest compared to an increase of 0.3% in August, a leap to 3.5% is indeed significant.
However, opportunities are fleeting, as at the beginning of October, rates soared again. This must disappoint many potential buyers and sellers. Where are the promised lower rates? Why are they rising again?
In previous articles, I have analyzed that mortgage rates may not decrease in sync with the Fed rate cuts; rather, the mortgage market has already reacted early to the rate cut signal, and there may not be much room for further decreases, likely to stay around 6% this year. However, as mentioned earlier, if the job market does not show clear signs of decline, the chances of rates remaining high will increase.
It is certain that a Fed rate cut does not automatically lead to a sudden drop in mortgage rates. In fact, Wall Street analysts have significantly lowered their expectations for Fed rate cuts, and the 10-year bond yield has recently surged, driving mortgage rates up. Some forecasters even suggest that the Fed may have to pause rate cuts to prevent a further acceleration of inflation.
As Fed Chairman Powell has stated, a significant half-point rate cut does not necessarily indicate future rate cut paces; policy will still depend on the data.
The Mortgage Bankers Association believes that long-term rates, including mortgage rates, will remain relatively narrow next year and mortgage rates over the next 12 months will hover around 6%.
Furthermore, as mortgage rates rise again, refinancing activities have been impacted. On October 9, the Mortgage Bankers Association reported a drop in the index measuring mortgage application volume for the past week. As of the week ending October 4, the market index fell by 5.1% to 277.5 from a year ago when it was 179.3. The refinancing index also dropped by 9.3%, showing a larger decline.
For homes below $766,550, the average contract rate for a 30-year mortgage was 6.36% during the week ending October 4, reaching the highest level since August.
For jumbo loans over $766,550, the 30-year mortgage average rate was 6.64%, up by 14 basis points from the previous week. The Federal Housing Administration-backed 30-year mortgage had an average rate of 6.22%, up by 16 basis points; 15-year rates were at 5.71%, up by 20 basis points; adjustable-rate mortgage rates were at 6.06%, up by 19 basis points.
Homeowners considering refinancing and prospective buyers have different considerations. Homeowners may be more concerned about rate changes as refinancing balances, often greater than government loans, may be more sensitive to specific mortgage rate fluctuations; for buyers, although rates have dropped over the past two months and confidence has risen, house prices are still too high.
For refinancing homeowners, a rate drop exceeding one percentage point would be meaningful as borrowers consider the costs associated with refinancing, including initiation fees and settlement fees, which might offset potential rate savings. If the upfront costs amount to $6,000 and only a $100 monthly saving is achieved, then the incentive for refinancing may not be significant. If homeowners who bought last year at a rate of 7.6% saw rates drop to around 6.1% recently, it would be a very worthwhile scenario for refinancing.
A real estate broker working in both California and Florida mentioned that many are waiting for further rate drops and are currently holding off on making decisions. Part of the reason is that mortgage payments are significantly higher than rent. Taking Los Angeles as an example, the average monthly rent is $2,890, while the average monthly mortgage payment is $4,986, a difference of over $2,000!
However, in the northern part of Florida’s market, it’s a different story altogether. With a new construction boom in the area, buyers are seeing great benefits. A local broker mentioned that builders are offering significant incentives ranging from dropping prices, reducing closing costs, to heavily discounting rates to appease buyers’ concerns. There have even been instances where builders provide free swimming pools in some communities to encourage potential buyers to sign contracts.
Many real estate experts believe that unless rates drop significantly, such as a one percentage point or more decrease, the existing housing inventory is not likely to flood the market massively, thus limiting supply. Therefore, experts predict that home sales will remain sluggish in 2024 and 2025.
Not only are rates a driving factor, but the presidential election is drawing closer, and election factors are attracting a lot of attention. A real estate broker stated that the market will become more active after the elections.
At present, however, in the 50 largest markets in the U.S., more than half of the median listing prices year-over-year are declining, with one even dropping by over 12%.
According to Realtor.com’s September housing market report, as the housing market cools down, the median price of homes for sale in September decreased by 1% compared to last year, reaching $425,000. Good news for buyers is that some of the most desirable places to live, from the East to the West Coast, are seeing steep falls in house prices.
Among the top ten cities with reducing prices, Florida claims four spots, including Miami with a year-on-year decline of 12.4% and a median listing price of $525,000, followed by Cincinnati, Ohio; San Francisco, California; Kansas City, Missouri; Austin, Texas; Jacksonville, Florida; Denver, Colorado; Orlando, Florida; Tampa, Florida; and Nashville, Tennessee. With declines ranging from 12% to 5%, this offers hope to homebuyers. ◇