50 bps

Last week, Jay Powell and Co. lowered what is referred to as the Fed Funds rate by 0.50% or 50 basis points (bps). What’s interesting is the response of long-term bond rates. Rather than a corresponding drop in long-term bond rates and an increase in bond prices, the opposite has happened. The 10-year Treasury yield is actually up since the FOMC announcement, meaning 10-year Treasury bond prices are down.

What’s this all about? We aren’t completely sure, though it is and will have a significant impact on the housing market.

FANNIE MAE RESEARCH According to Fannie Mae’s Economic and Strategic Research group, the Buyer’s Strike is expected to continue. This in spite of lower mortgage rates over the last year, and a sharp increase in active listings. Why? Prices are too high relative to incomes available to make the purchase.

According to the recent Fannie Mae report, there has been no increase in loan application activity. Their observation? Buyers are waiting for either lower mortgage rates, or lower home prices, or both. Quoting the report, “Regardless of the lever, we expect affordability to remain the primary constraint on housing activity for the foreseeable future, and we now think full-year 2024 will produce the fewest existing home sales since 1995”.

MORTGAGE RATES In January of 2017, average 30-year fixed mortgage rates were 4.3%. This number dropped to below 3% at the end of 2021 and beginning of 2022, before hitting almost 8% by November 2023. And now, just ten months later? That 30-year fixed number is 6.1%.

EXISTING HOME SALES According to data from YCharts and the National Association of Realtors, existing home sales will likely finish 2024 near levels last experienced in 1995. Existing home sales were about 3.8 million units. This number escalated nicely over the next several years, peaking in 2006 at more than 7 million units. 2008 saw unit sales drop to just over 4 million before climbing back to over 6 million in 2021.

HOW TO BENEFIT What can you do with this information? If you have picked up a mortgage with a rate of greater than 7%, keep an eye on both 30-year and 15-year fixed rates. One idea would be to refinance once you can find a 15-year fixed rate at or close to 4.5%. An example. A 30-year fixed rate mortgage of $300,000 at 7% generates principal and interest monthly payments of $1995. A 15-year fixed rate mortgage of $300,000 at 4.5% generates principal and interest monthly payments of $2295. For an additional $300 monthly, you can pay off the mortgage in 15 years instead of 30 years.

Another way to benefit? For those of you buying residential real estate for investment, have your realtor keep an eye on declining prices for existing homes for sale. And in particular, have them look for either distressed situations or distressed properties, depending on your investment preferences. For those sellers who must sell for whatever reason, insufficient demand can create buying opportunities for you.