When mortgage rates dipped late last year, real estate agents John and Robert Farrell saw more sellers coming to them and thought the unbalanced housing market might be beginning to normalize.
Those hopes quickly faded.
As far as demand is concerned, business has been booming for the past year for EXIT Realty, the Farrell’s real estate agency in Binghamton, New York. The father and son duo have had to field as many as 10 offers at a time, with half their listings selling within 10 days.
The problem has been supply: With few homes on the market, prices have continually spiraled upwards.
Hope for a more normalized market came at the end of last year and the beginning of this year. Mortgage rates were coming down, supply was inching back up and it seemed inflation would slow down substantially. That led to optimism that the housing market would begin to balance out between buyers and sellers.
“The expectation was that 2024 would bring about lower mortgage rates, a little bit better availability and improvement on the inventory side, and the increased likelihood of that soft economic landing,” said Greg McBride, chief financial analyst at Bankrate.
Instead, three months down the road, inflation has remained stubbornly above the Fed’s target of 2%, federal fund rate cuts have not yet materialized and mortgage rates have stabilized around 7%. Supply remains constrained and demand is not diminishing, continuing to drive the price of homes up ever higher and keeping the market dramatically skewed in favor of homeowners and sellers.
On one weekend in January, the Farrells had close to twice as many clients holding open houses than they had in October, but that number quickly fell back down to similar levels they’ve been seeing for the past year. A few clients even took their homes off the market when rates didn’t keep going down and instead started inching back up. Now, the supply of homes remains totally constrained.
“Today, we have somewhere between 1,000 and 1,300 current buyers, and we have 225 listings,” said John Farrell. “A balanced market is when you have 500 buyers and 1,200 houses, so it’s almost reversed.”
The logjam in the housing market began when the Federal Reserve began raising rates in 2022. After years of ultra-low mortgage rates near or below 3%, rates climbed to a peak of around 8% last October, a 23-year high. Buyers did not want to pay higher monthly bills, and potential sellers did not want to exchange their locked-in sub 3-4% mortgage rates for new rates more than twice as high.
As a result, existing home sales tumbled below 4 million units over the course of 2023. Supply fell even lower than demand, leading prices to increase on what few houses were sold.
By the end of 2023, inflation was easing up, and there was buzz of an economic “soft landing.” This made the Federal Reserve announce that they were beginning to consider cuts to their fund rate.
The common belief that inflation was slowing down substantially and federal fund rate cuts were just around the corner created an optimistic response in the market, and in December, mortgage rates fell close to 6.5%. This led to a 3% year-over-year jump in existing home sales in January, spurred by mortgage rates which were more attractive to buyers and low enough to begin loosening up the supply of existing homes. Supply saw a 3.1% year-over-year increase, up to 1.01 million units — still very low, but any increase was welcomed.
But when inflation proved more stubborn than hoped, the Fed delayed rate cuts, and mortgage rates stopped falling. As a result, January’s glimmers of optimism have faded.
“The reason we haven’t seen mortgage rates come down as fast is because inflation hasn’t come down as quickly as had been hoped or expected,” said McBride. “If you saw mortgage rates drop to say, 5%, I think inventory would be notably higher than it is today, but so would buying power, so those two could even themselves out.”
Indeed, even when inventories briefly increased earlier this year, the Farrells saw a proportionate increase in buyer interest, so there was no clear effect on the rising price of homes.
It seems that despite the already large demand for homes, there is an even greater latent demand which will continue to emerge as mortgage rates go down and the rate of price increases diminish.
Economists still foresee federal fund rate cuts through 2024, but they likely won’t be enough to improve affordability. It will be easy for demand to keep up with the gradual loosening of supply from small rate cuts and dips in mortgages, because the economy has been much stronger than expected at the start of the year. Until the economy cools down, demand and prices will remain elevated while supply slowly rectifies itself.
For now, the housing market is stuck in a stubborn seller-favored position. For prices to adjust quickly, there would need to be a recession that causes inflation to drop dramatically and the Fed to slash interest rates. This would drive down mortgages and open up supply, but most people would no longer be able to afford homes, and the market would just face a new, different set of problems.
Mortgage rates will eventually ease, and economists say they won’t have to come all the way back down to 3% or 4% for supply to return to normal. Gradually, homeowners will begin to accept higher rates, and they will have to move for practical reasons. Prices will level off once enough supply has returned, but this will take a long time.
“I don’t see anything the Fed does in the next 6 months having an appreciable effect,” said Morici. “I’m not optimistic that the housing market is going to change a whole lot. In time people will have to sell, they’ll just get old and have to get out, but it’s going to be a few more years before that grips.”
