What caught my eye last month is both August sales and median prices fell simultaneously for the first time since January. After a 12.0 percent pop in July, August sales fell 1.8 percent as the California real estate market digested a 100 basis point increase in mortgage interest rates in mid-June. The decline in August sales caused the nearly uninterrupted 20-month increase in median home prices to finally take a breather.
This will be an interesting trend to watch. The combination of the rapid increase in mortgage interest rates and decline in sales, primarily due to the decline in distressed property sales, cash sales and investor purchases, will likely result in decreased demand. The decrease in demand, in turn, will likely depress prices and cause an increase in inventory. Actually, as of this writing, inventories have increased and days on market have increased, creating a clear shift in market forces.
Assuming interest rates don’t rise much further, the increase in inventory will be welcome news for the California real estate market, which has been challenged by an acute shortage of inventory for much of the past year. Many potential homebuyers with solid incomes and good credit looking to finance their home purchases who have been shut out of the market due to lopsided bidding wars against cash buyers should now have a better shot at getting into contract, albeit, at slightly higher rates than three months ago. While mortgage interest rates have jumped in recent weeks, we doubt they will rise much further because the Federal Reserve is keenly aware of the importance of the housing market to an ongoing economic recovery. I believe the Fed is not likely to remove its support from the housing market anytime soon and mortgage interest rates are still low by historic standards.
Quantitative Easing To Remain For Awhile- What Does It Mean For RE?
The Federal Reserve’s decision to maintain current levels of stimulus is, of course, great news for the housing market. Within seconds of the Fed’s announcement, yields on the 10-year Treasury note fell 10 basis points to 2.75% and will likely trend lower. Mortgage interest rates are sure to follow.
With the cloud of uncertainty concerning the Fed’s decision gone, we believe the recent volatility in the mortgage interest rate market will likely retreat until sometime next year when talk of tapering will likely return. In our opinion, the Fed’s are keenly aware of the importance of the housing market to the economic recovery. For that reason, we doubt the Fed’s will consider reducing support anytime soon.
The recent interest rate hikes should result in price declines. Home buyers have always bought as much home as their banker told them they could afford – and they can now afford 10 percent less than they could before the rate increases. But price declines won’t happen quickly. Sellers, unlike buyers, tend not to believe that such a correction is necessary, and therefore do not drop prices to reflect what buyers can now afford. They are buoyed by mistaken analysis that because both interest rates and prices rose in the 80′s, rising rates don’t mean lower prices. But those were different times. Then we had high inflation, which included wage inflation, allowing buyers to digest both the rise in rates and price. That simply isn’t true today. The next few months will be fascinating to watch. Will prices correct to reflect the new rates, I doubt it. More likely we will see slower sales and more inventory.