In the real estate market report for September, transaction volumes performed impressively with the highest growth in buying and selling since last year. The reason, of course, was the recent low point in mortgage rates in September. However, what surprised me was that it was not an immediate increase in house prices following the lower rates. Instead, as we entered October, despite the rise in interest rates, sales volumes did not decrease accordingly. So why is that? Let’s delve into it together.
First, let’s look at the recent real estate data in the United States. According to Redfin, in the four weeks leading up to October 20, the sales volume of homes for sale in the U.S. increased by 3.5% year-over-year, marking the largest growth in three years. In the 50 largest metropolitan areas in the U.S., 35 cities saw an increase in the number of homes sold.
In terms of prices, the median sales price was close to $385,000, while the median listing price was nearly $400,000, representing a respective increase of 4.7% and 6.1% compared to the same period last year. One shows the largest increase since March this year, and the other is the biggest increase in nearly two years.
On the supply side, the new listings of homes increased by 2.2% compared to the same period last year, with available listings for sale up by 15.2%. Although these are almost the smallest increments in recent times, the supply level still reaches a 4.1-month inventory level, indicating the market is heading towards a balance between supply and demand. Longer days on the market and decreasing percentage of listings selling above asking price also indicate a stable market in the U.S. real estate sector that now leans towards a balanced buyer-seller interaction, rather than favoring sellers only.
Now, let’s shift our focus to the statistics from Realtor.com for the week ending October 19. It’s important to note that this is a one-week statistic, different from the four-week statistic provided by Redfin earlier.
The data shows an extension of 8 days in days on market, suggesting that buyers are still observing and waiting for more favorable housing conditions. New listings compared to a year ago increased by 4.7%, rebounding from the previous week’s decline following the impact of Hurricane Milton, showing a return to an upward trend. However, fluctuations in interest rates may further impede sellers from moving their homes.
On the available listings front, there has been a 28.7% growth compared to the same period last year, marking the 50th consecutive week of year-over-year growth since November 2023. This week’s growth rate is lower than the previous week, the lowest annual growth since April this year. The increase in inventory is largely attributed to more seller activity than buyer activity, but listing quantities have stabilized over the past few weeks, indicating that buyer activity may start catching up.
In terms of prices, the median listing price remained unchanged, making it the 21st consecutive week below or equal to the levels of the same period in 2023. This indicates that sellers are continuously adjusting prices to attract potential buyers. In September, the percentage of discounted listings increased to 18.6%, rising by 0.9 percentage points from the same period last year.
While the two real estate market data sets may seem different, they do show a common trend: the market is moving towards balance. This means that sellers are increasing while buyers are decreasing, alleviating the severe imbalance that favored sellers previously. Therefore, buyers now have more negotiation room and time to consider different housing options and conditions. As a result, it’s less likely for buyers to rush into purchases due to fear of missing out and end up with a property that doesn’t suit their needs.
However, considering the recent increase in interest rates and the upcoming uncertainty of the elections, the sales performance has surprisingly not weakened but rather exceeded expectations. Redfin economists have expressed concerns about the potential increase in government debt after the election, leading to rising bond yields and mortgage rates.
Many potential buyers are of the opinion that interest rates are unlikely to drop soon and are concerned about a potential rise post-election. For those with a strong need to purchase a property, it may be better to buy sooner. A real estate agent in Atlanta mentioned that properties in ideal locations, with highly-rated schools and lower taxes, are still in demand. However, more buyers are negotiating prices, requesting concessions from sellers and funds for closing costs. Some buyers are asking for minor modifications or upgrades to properties, while many are opting for adjustable rates or shorter loan terms instead of fixed rates.
This might disappoint those hoping for a quick drop in house prices. However, different data sets may yield varying results, and there may even be opposing trends. Nevertheless, as of now, there is no sign of a collapse in the real estate market according to the available information.
Priscilla Almodovar, CEO of Rocket Mortgage by Quicken Loans, highlighted in a recent interview with financial website MarketWatch that the current real estate market is entirely different from the 2008 financial crisis. Back then, there was an oversupply issue compounded by bad loans from banks, leading to a system collapse. However, today’s supply is simply not sufficient, and despite high rates and increased insurance costs, many people still wish to purchase homes quickly.
Almodovar emphasized that the 3% low interest rates during the pandemic may be a once-in-a-lifetime occurrence and the real estate market reaching new highs in the past twenty years indicates a strong demand exceeding supply. Addressing the supply issues would require collaboration among federal, state, and local governments.
Why are people and investment institutions still enthusiastic about real estate purchases? A recent article from “Business Insider” suggested that Goldman Sachs and JPMorgan are skeptical about the returns from stocks and bonds, recommending considering real estate investments instead, especially targeting commercial real estate during a downturn for bargain opportunities.
Goldman Sachs predicts a 3% annual increase in the U.S. stock market over the next decade, lower than the 13% average annual growth of the past ten years. Their reasoning includes challenges like high valuations, excessive concentration of major stocks, increased risks of economic recession, declining profits, and rising interest rates.
Goldman Sachs foresees the end of a ten-year golden era for the stock market. A new report from their investment portfolio strategy research team predicts an annualized return rate of only 3% for the S&P 500 index over the next decade. The data indicates that this would place it at the 7th position in terms of performance since 1930.
Analysts suggest that investors should prepare for lower stock returns over the next decade, nearing the lower bound of typical performance. Goldman also opines that the stock market’s performance in the next ten years will struggle to outperform other assets. By 2034, there is about a 72% chance that the S&P 500 index will lag behind bonds, and a 33% chance it will trail inflation.
Firstly, the stock market valuation is at historical highs, signaling lower future returns. Secondly, market concentration is approaching its highest level in almost a century. Analysts believe that when market concentration is high, the index’s performance largely hinges on the prospects of a few stocks rather than broader economic performance.
Although some may debate the staying power of tech stocks for growth, Goldman indicates that revenue growth for S&P 500 companies will significantly decline in ten years. Historical trends show that sustaining high levels of sales growth and profits over an extended period is challenging for any company.
Goldman also anticipates more frequent economic contractions over the next decade, projecting four GDP contractions within one-tenth of a quarter for the United States during this period. Finally, due to strong economic data reports, investors have adjusted their expectations for rate cuts, with ten-year bond yields exceeding 4%, further impacting tech stock prices. In other words, limiting inflation to the 2% target might require more time than expected, restricting future rate cuts, which could affect company profits adversely.
Moreover, senior executives of JPMorgan Asset Management unanimously agree that according to their annual Long-Term Capital Market Assumptions report released on October 21, the U.S. large-cap stocks are expected to appreciate at a rate of 6.7% annually over the next 10 to 15 years. However, globally, stock markets are projected to rise by 7.2% to 8.1% annually during the same period.
Though the median annual growth of U.S. large-cap stocks is commendable, it is significantly lower compared to 7.9% two years ago and 7% last year. JPMorgan explains this more moderate outlook by pointing out that while the S&P 500 index performance record has instilled confidence in some bulls, their strategists are concerned that future growth may have been prematurely exhausted – meaning that the momentum for growth might have already peaked.
Taking inflation into account, JPMorgan Asset Management anticipates that the long-term return rate for a standard 60-40 investment portfolio will be below 5%, applicable to large-cap stocks and bonds as well. While this return might satisfy some investors, it may take over 16 years for funds to double.
The yield from core U.S. real estate is expected to be close to 6%, surpassing the slightly over 4% from a few years ago and far higher than the 4.2% yield from ten-year Treasury bonds. Despite real estate being considered expensive, JPMorgan’s portfolio strategists believe that when looking at total returns from starting point to estimated total value, this presents a generational investment opportunity.
JPMorgan’s strategists particularly favor commercial real estate, noting that the demand for commercial spaces has been significantly affected since the pandemic. However, the risks are already reflected in the pricing. Opportunities in multi-family residences, student dormitories, cell phone towers, and data centers – all areas with high demand in commercial buildings – may present good entry points for commercial real estate investments.
In conclusion, both data sets highlight the evolving dynamics in the real estate market, driven by a mix of economic factors, governmental policies, and investor sentiments. While the future remains uncertain, the opportunities and challenges in the real estate sector continue to attract attention from both buyers and investors seeking stability and potential returns in the midst of shifting market conditions.