Lazerson: Rate cut means home prices will moderate as inventory rises

Much of the Fed’s action was anticipated and already baked into 30-year mortgage rates

By Jeff Lazerson | jlazerson@mortgagegrader.com | MortgageGrader.com | September 24, 2024

Article originally posted in Orange County Register on September 19, 2024

Sorry, house hunters, the recent rate cut by the Federal Reserve won’t move the housing market much.

A host of economists I surveyed offered modest expectations after central bankers cut their benchmark interest rates for the first time in four years. The Fed’s rate took a somewhat unexpected half-point trim as unemployment is rising and inflation diminishing. Most predictions were for a one-quarter point cut.

The rate cut directly reduces the interest rate on any type of loan tied to the prime rate. In the housing sector, the base rate for anybody with a home equity line of credit will be paying interest at 8%, rather than the previous 8.5%. Assuming a $100,000 HELOC, going from a prime-only rate of 8.5% to 8% means a 5.8% payment reduction ($708 to $667). Every bit helps.

Mortgages do not run in tandem with HELOCs when considering the half-point rate reduction, for example. In other words, last week’s Freddie Mac 30-year fixed rate was 6.2%. This week, that rate is 6.09%, not a one-half percentage drop to 5.7%. By the way, a year ago Freddie Mac’s fixed rate was 7.18%. So, we’re down more than a full point from a year ago.

Much of the Fed’s action was anticipated and already baked into 30-year mortgage rates. In this case, we may see more downward rate movement over time, since the Fed said it would likely make more rate cuts.

What are some economists thinking about the economy and housing going forward?

The good news? Nobody is talking about a recession, even with the promise of more future short-term rate cuts.

Raymond Sfeir, professor of economics and director of the Gary Anderson Center for Economic Research at Chapman University, thinks demand will pick up as mortgage rates decline.

But Sfeir is worried about the national debt.

“Deficits are a real concern as we’ve added $2 trillion in additional debt this year. We spend 7.8% in interest expenditures by the federal government,” said Sfeir. “It will be 15% by 2033. The long-term effect is it pushes interest rates up.”

The government must sell more bonds at higher rates to attract investors, he said.

Jordan Levine, chief economist for the California Association of Realtors, pointed to a growing economy and a moderating median home price.

“We’ll see slower growth, but we won’t dip into a recession,” Levine said. “We’ll see 5% year-over-year gains (for California median priced homes). Mortgage rates won’t change much between now and the end of year.”

Are lower interest rates moving more homes? Not so much.
“As rates have dropped from 7.5% to 6%, there has only been a slight bump in demand,” said Steven Thomas, chief economist and author of Reports on Housing. “Rates need to go lower to push demand higher.

“The story this year is that there have been more homeowners willing to sell; however, buyer demand has not changed much from last year,” Thomas continued.

As a result, he said extra sellers have been accumulating, building inventory, and the market has slowed considerably since the early spring.

The following are county inventory levels from Sept. 12 compared to Sept. 14, 2023, from Reports on Housing:

—Los Angeles 11,897 compared to 8,210

—Orange 3,695 compared to 2,353

—Riverside 6,351 compared to 4,327

—San Bernardino 5,255 compared to 3,909

—San Diego 4,752 compared to 2,731

Expected market time (from listing date to going into escrow) for the same dates as above:

—Los Angeles 100 days compared to 72 days

—Orange 78 days compared to 48 days

—Riverside 100 days compared to 70 days

—San Bernardino 103 days compared to 82 days

—San Diego 84 days compared to 52 days

Don’t expect to see a lot of homeowners selling while sitting on low mortgage rates, said Moussa Diop, an associate professor at USC’s Lusk Center for Real Estate. “Sixty percent of mortgages are at 4% or lower,” Diop said. “Rates need to be 4% to 5% for them to move.”

I am not an economist. My sense of the market is that given the gargantuan home prices, brisk rise in inventory for sale and days on market, we’ll see a flattening of the median priced home over the next year. My hunch says the region’s median price will go up 2% year over year.

For the most part, the only sellers we’ve been seeing are from death, divorce and job transfers. Expect to see more home sellers due to job losses. Others will leave because of the high cost of living and homeownership in California.

Let’s not forget that homeowners’ insurance rates have gone over the moon, as are HOA fees.

This time next year, I think the prime rate will be 6% compared to 8% today. And mortgage rates will be 5%.

Freddie Mac rate news: The 30-year fixed rate averaged 6.09%, 11 basis points lower than last week. The 15-year fixed rate averaged 5.15%, 12 basis points lower than last week.

The Mortgage Bankers Association reported a 14.2% mortgage application increase compared to one week ago.

Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $766,550 loan, last year’s payment was $423 more than this week’s payment of $4,770.

What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with one point: A 30-year FHA at 4.875%, a 15-year conventional at 4.625%, a 30-year conventional at 5.375%, a 15-year conventional high balance at 5.25% ($766,551 to $1,149,825 in LA and OC and $766,551 to $1,006,250 in San Diego), a 30-year high-balance conventional at 5.625% and a jumbo 30-year fixed at 5.99%.

Note: The 30-year FHA conforming loan is limited to loans of $644,000 in the Inland Empire and $766,550 in LA, San Diego and Orange counties.

Eye-catcher loan program of the week: A 30-year mortgage, with 30% down locked for the first 5 years at 5.25 with 1 point cost.

Jeff Lazerson, president of Mortgage Grader, can be reached at 949-322-8640 or jlazerson@mortgagegrader.com. His website is www.mortgagegrader.com.

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* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.