Even though Fed Chair Jerome Powell remarked that it’s too soon to definitively conclude that rate hikes are finished, the financial markets have, in fact, decided they’re finished. As of December 4, 2023, interest-rate futures traders (the people who make a lot of money being right about where rates will go) expect the Fed to cut the federal funds rate, which currently falls between 5.25% and 5.50%, by 1.25%.
As a quick recap, the Fed dropped the fed funds rate effectively to 0% at the start of the pandemic and purchased mortgage-backed securities. The already historically low average 30-year mortgage rate then fell even further, reaching a record low of 2.65% in early 2021, which fueled the housing boom from June 2020 to June 2022. Inflation spiked in 2021, hitting levels not seen since the early 1980s and causing the Fed to begin rate hikes in March 2022, which trickled through markets quickly. From the beginning to the end of 2022, mortgage rates more than doubled, ending the white hot housing market and creating the slow-paced 2023 market. Mortgage rates continued to rise in 2023, hitting a 23-year high of 7.79% in October. Luckily, the average 30-year mortgage rate contracted in November 2023, falling to 7.22% by the end of the month.
It’s hard to convey the full significance of higher mortgage rates on the housing market but, in short, they are the primary driver of the market slowdown. This is evidenced by the fact that the market began slowing down at almost the exact same time that the Fed began their rate hikes. In October 2023, a buyer’s monthly cost reached an all-time high when accounting for the cost of financing a mortgage. Redfin reported the highest rate of buyers backing out of home purchases on record, as home buyers experienced the sticker shock of the cost to finance the home. It should come as no surprise that sales continued to fall and will likely continue to decline through the winter months.
Now, back to our outlook for the year ahead. The falling sales in 2023 have allowed inventory to grow, which is much needed. Although inventory is still down 6% year over year, it has increased 20% in 2023 and will likely continue to increase through the rest of the year, which is far different from the typical seasonal trend of increasing in the first half of the year and declining in the second. In Q1 2024, we expect inventory to rise further, helping ease the low supply problem. Greater supply will be necessary because mortgage rates should decrease meaningfully with the anticipated rate cuts, driving up demand. A 1% decrease in interest rate equates to a 10% decrease in monthly financing costs. At this point, we expect a large number of would-be buyers to wait a little longer to gain more clarity around rate cuts in 2024 and hit the market in the spring and summer months.
Different regions and individual houses vary from the broad national trends, so we’ve included a Local Lowdown below to provide you with in-depth coverage for your area. In general, higher-priced regions (the West and Northeast) have been hit harder by mortgage rate hikes than less expensive markets (the South and Midwest) because of the absolute dollar cost of the rate hikes and limited ability to build new homes. The National Association of Realtors’ Chief Economist Lawrence Yun recently remarked that multiple offers are still occurring, especially on starter and mid-priced homes, even as price concessions are happening in the upper end of the market. As always, we will continue to monitor the housing and economic markets to best guide you in buying or selling your home.
Big Story Data
The Local Lowdown
The median single-family home and condo prices declined across most Texas markets in November. Greater Austin is notable in that the median single-family home and condo prices hit a two-year low, which could easily attract potential buyers in the near future.
Active listings and sales fell month over month. However, in 2023, inventory in Texas’s major metro areas have increased meaningfully. Rising inventory is only good for the housing market, which is likely to experience much higher demand in 2024.
Months of Supply Inventory has risen over the past five months, indicating the market has shifted in buyers’ favor. It’s common for MSI to trend higher in the fall and winter, when fewer buyers are in the market and sales slow.
Home prices declined in November, in line with seasonal norms
In Texas, the home prices haven’t been largely affected by rising mortgage rates with the exception of Greater Austin, which has had a major price contraction since May 2022. Broadly, price contractions are normal in the second half of the year, so it’s hard to conclude that higher rates have had any meaningful effect on price across most of Texas’s major metros. We expect prices to remain below peak in the winter months, but as interest rates decline, prices will almost certainly reach new highs in the first half of 2024 in all the selected major markets except Greater Austin. Additionally, the inventory build-up in 2023 will create a healthier market in 2024, satiating demand as it grows.
High mortgage rates soften both supply and demand, so ideally, as rates fall, far more sellers will come to the market. Rising demand can only do so much for the market if there isn’t supply to meet it. Unlike 2023, 2024 inventory has a much better chance of following more typical seasonal patterns.
Inventory, sales, and new listings declined month over month
Inventory trended higher into the fall of 2023, which is far from the seasonal norm. Typically, inventory peaks in July or August and declines through December or January. In November, as sales and new listings declined, inventory fell from October to November. Notably, inventory reached a two-year high in October for single-family homes in Greater Houston and Greater San Antonio, and for condos in Greater Houston, before dropping slightly in November. Supply in Texas is rare in the United States, in that it actually built up to pre-pandemic levels this year, moving higher primarily due to softening demand caused by higher interest rates and normal seasonality. New listings have been slightly lower than last year, so inventory growth has been driven by fewer sales.
As demand slows, buyers are gaining slightly more negotiating power and paying less than asking price on average. The average seller is receiving a lower percentage of list price than they did in the first half of the year, but only by 2-3%. The market will likely be slower during the holiday season, but buyer competition will ramp up meaningfully in the spring, which will create price support.
Months of Supply Inventory rose meaningfully over the past five months, indicating that housing markets are trending in buyers’ favor.
Months of Supply Inventory (MSI) quantifies the supply/demand relationship by measuring how many months it would take for all current homes listed on the market to sell at the current rate of sales. The long-term average MSI is around four to five months in Texas, which indicates a balanced market. An MSI lower than four indicates that there are more buyers than sellers on the market (meaning it’s a sellers’ market), while an MSI higher than five indicates there are more sellers than buyers (meaning it’s a buyers’ market). MSI rose significantly over the past five months largely due to the decline in sales and longer time on the market. Currently, for single-family homes, MSI indicates that Greater San Antonio favors buyers, Greater Austin and Greater Houston are balanced, and Dallas-Fort Worth still favors sellers. For condos, MSI indicates that the markets favor buyers except for Dallas-Fort Worth, which is balanced.
Local Lowdown Data