Note: You can find the charts & graphs for the Big Story at the end of the following section.
The next Fed meeting isn’t until the end of January, but financial markets have already made major assumptions about what the Fed will do in 2024. In the December 2023 meeting, Fed members indicated there would likely be three 0.25% cuts to the fed funds rate by the end of 2024, but they noted a high degree of uncertainty. Markets took this news and made their own conclusions. As of January 3, 2024, fed funds 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 by a quarter point six times in 2024. Currently, the fed funds rate is between 5.25% and 5.50%.
In any case, for the >70% of homebuyers who finance their purchases with mortgages, rate cuts are very good news, as shown by the month-over-month increase in sales. However, even before the December meeting, economic indicators seemed favorable for rate cuts, which, in part, caused mortgage rates to drop 0.57% in November 2023 — a significant fall from the 23-year high of 7.79% in October. Markets move a lot faster than the Fed, and the 1.18% mortgage rate drop in November and December brings to mind the trends we saw in the first quarter of 2022. In December 2021, Fed Chair Jerome Powell stated that they were increasing rates beginning in March 2022, but mortgage rates increased by about a point in the first quarter even before the Fed made any changes.
The 1.18% decline in mortgage rates has set the stage for a much busier spring and summer season, although we still expect a relatively slow first quarter. Interest rates are still too high for potential buyers and sellers to rush back to the market, especially when they expect further rate cuts. However, if mortgage rates were to drop another point to around 5.5%, a huge number of participants would jump back into the market. Remember that every 1% decrease in interest rates roughly equates to a 10% decrease in monthly financing costs. The inverse is also true, which is why rates have priced buyers out of the market and remain the primary cause of the market slowdown over the past two years.
Because inventory hasn’t grown, prices haven’t meaningfully declined. In fact, home prices currently fall only 8% below the June 2022 all-time high, which means that any savings will likely come from rate drops. Even if a significant number of sellers come to market, there’s enough pent-up demand that inventory won’t be able to grow enough for prices to stagnate or decline outside of normal seasonal trends. On top of that, home prices almost always appreciate. In other words, betting on home prices to decline is statistically similar to betting on 00 in roulette. Nationally, the median price will likely hit a new all-time high in June 2024. The National Association of Realtors’ Chief Economist Lawrence Yun recently remarked that home prices keep marching higher, and only a dramatic rise in supply will dampen price appreciation.
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. As always, we will continue to monitor the housing and economic markets to best guide you in buying or selling your home.
Note: You can find the charts/graphs for the Local Lowdown at the end of this section.
In Southern California, home prices seem to be impervious to rising mortgage rates and even normal seasonal trends, hitting all-time highs in recent months. The median San Diego prices for single-family homes and condos reached new all-time highs in August 2023. Orange County single-family home prices reached a new record in September 2023. In December, the median single-family home prices were only slightly below their peaks. Similarly, condo prices are near all-time highs across Southern California counties. Orange County prices were particularly notable in the fourth quarter of 2023. Normally, we expect prices to contract (at least slightly) in the second half of the year, but Orange County homes are so desirable and in such short supply that prices continued to rise. As interest rates decline, prices will almost certainly reach new highs in the first half of 2024 — possibly as soon as the first quarter of the year. The sustained downward inventory and low number of new listings will only raise prices as demand grows. More homes, however, must come to the market in the spring and summer to get anything close to a healthy market.
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 inventory, 2024 inventory has a much better chance of following more typical seasonal patterns.
Single-family home and condo inventory have trended lower over the past 16 months, which is far from the seasonal norm. Single-family home inventory hit all-time lows across Southern California in December. Typically, inventory peaks in July or August and declines through December or January. In 2023, inventory patterns didn’t resemble the typical sine wave, since far fewer sellers came to the market, especially in the first half of the year. With inventory at historic lows, the number of new listings coming to market will be a significant predictor of sales. Month over month, new listings fell 37% and sales declined 3%. Year over year, sales and new listings are down 5% and 8%, respectively. Total inventory is down 22% year over year.
As demand slows, buyers are gaining more negotiating power and paying slightly less than asking price on average. In July 2023, the average seller received 99% of list price, compared to 97% of list in December. However, on average, buyers paid 3% more in December 2023 than December 2022. Inventory will almost certainly remain historically low for the next few months, and buyer competition will ramp up meaningfully in the spring, which will drive price appreciation.
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 three months in California, which indicates a balanced market. An MSI lower than three indicates that there are more buyers than sellers on the market (meaning it’s a sellers’ market), while a higher MSI indicates there are more sellers than buyers (meaning it’s a buyers’ market). MSI fell below three months in the first quarter last year and remained fairly stable from March to August. MSI increased meaningfully from August to November in Los Angeles, Riverside, and San Diego, indicating the market is more balanced for single-family homes. However, MSI fell across Southern California and, in December, Los Angeles and Orange County MSI indicated that the market favored sellers.
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