Ever since the market crash of 2008-2009, economists and pundits alike have used the phrase “new normal” to describe everything from stock market conditions to inflation to the employment market and everything in between. As we are now a decade and a half removed from that economic meltdown, I feel that a bit of reflection is in order. Did that period of time, albeit historic in many ways, usher in an actual “new normal” or was it simply an atypical period within an otherwise normal 50-year economic period.
THE ROLLERCOASTER OF MORTGAGE RATES
It is natural to try and quantify atypical periods of time with profound titles and buzzwords. However, the housing market is littered with times in its history that can absolutely be defined as not normal. From 1975-1984, the United States mortgage market was far from normal. During that 10-year period of time, the average 30-year Fixed Rate Mortgage Average never got below 8.5%. The rate peaked at a mind-numbing 18.63% in October 1981! Conversely, we just finished another 10-year stretch from 2012-2021 where the 30-year mortgage rate average spent the majority of time floating between 3%-5%. These are two incredibly unique periods within the last 50 years.
Economic statistical data can create many different narratives, depending on the story we choose to tell. A short duration of time can often mislead and provide opportunity to make claims like “new normal”. Analyzing longer stretches of time will help to even out the data and provide us a more accurate, broader view of the information. It is only through this wider perspective that we are able to understand what is actually normal. For the majority of years between 1974-2023, the average 30-year mortgage rate drifted between 5%-10%. This is, in my opinion, a normal range.
Now that we have a better understanding of the last 50 years of mortgage rates, how might rates and the housing market in general behave for the next few years. While making short-term predictions is obviously challenging, recent history provides us with some very useful information. The largest, sustained increase in mortgage rates in the last 25 years began two years ago. In the first week of January 2022, the average 30-year mortgage rate was 3.22%. By October 2023, just 22 months later, borrowers were paying 7.79%. As we begin 2024, mortgage rates have improved to the 6%-6.5% range. It is our feeling at Walkner Condon Financial Advisors that rates will likely oscillate between 5%-7% for the next couple of years. The 10-year US Treasury rate movement, which has a very strong correlation with US mortgage rates, has trended down since October 2023 as well. We feel that mortgage rates could follow a similar path to 2001-2010 when the rates stayed mostly range bound between 5%-7%. Ultimately, I believe that the recent upward trend signals the end of an atypical period marked with unusually low interest rates and a move back to our norms as opposed to a “new normal”.
THE CHALLENGE OF INVENTORY… OR LACK THEREOF
The real estate market in general, whether in the US or abroad, tends to strictly follow the basic supply and demand principle that governs much of the economic world. A glut of inventory or too much supply will quickly put buyers in control and drive prices lower. Conversely, when the perception of buyers (and sometimes, all it takes is perception) is that inventory is getting squeezed, we can see buyers panic and begin a frenzy with prices getting pushed higher in a relatively short period of time. This, in turn, can lead to bidding wars, multiple offers on properties and offers with no contingencies.
The US housing market has been struggling with a lack of inventory, available homes to purchase, since the Great Recession in 2008-2009. The drop in new construction housing starts created a ripple effect that we are still feeling today. Over the next decade of the 2010’s, inventory levels were starting to get back to a more normal level, however, the pandemic in 2020 created a second housing upheaval that was unique in its own way. Supply chain issues caused not only huge delays in the completion of properties but significantly higher end prices to buyers as raw materials prices surged. This, along with a shortage of tradespeople, is creating a massive problem with no easy solution.
The real estate market differs greatly from the stock and bond markets in that prices of homes and apartments can and will be influenced by the simple fact that housing is a basic need. This, then, ties into socioeconomic trends such as demographics and the age of a population. It is estimated that the US is roughly 3 million homes short of equilibrium. The Millennial Generation is huge, relatively speaking, and they are coming into the house-purchasing phase of their lives. The Millennials comprise the largest US generation in the last century, even larger than the Baby Boomer generation. This is adding more and more buyers into an already crowded field looking to purchase.
Housing markets, both in the US and abroad, are being forced to adjust to a new type of buyer in the market. The Great Recession and subprime mortgage crisis lead to a plethora of foreclosed properties. This created the opportunity for institutional investors to enter the fold. Corporations began to purchase single family residences, both homes and apartment buildings to add to their investment portfolio. This trend has grown in the years since 2008-2009. Two different studies of the real estate transactions from 2021 found that investors purchased nearly 25% of all single family homes and 13% of all residential real estate properties.
It is our opinion that the inventory squeeze will remain an issue for at least the next few years. The higher interest rates of the past 12 months did help to alleviate some of the demand on inventory, but it became a double edged sword as homeowners chose to renovate their existing homes rather than selling their property and upgrading to a better home.
FORECAST FOR 2024
We feel that the real estate market will be greatly influenced by the economic developments of 2024, especially if the US economy does enter recession. This is a big “if” as many economists have backed off on their prediction of recession altogether or, at least, reduced the likelihood. The interest rate environment looks to have found a comfortable range of 5-7 percent. The Federal Reserve has signaled a desire to have less rate movements in 2024, with a possibility for rate cuts. We still anticipate a strong spring and summer for residential transactions. However, we could see price ranges become fractured with bidding wars still existing in some ranges and price reductions needed in others. We will see the US real estate market become more bifurcated as demand in some parts of the country will remain strong while other parts of the country will continue to see prices drop. All of that said, the current economic facets that strongly influence real estate markets such as the employment conditions, inflation, and interest rates are all trending in the right direction. It is our view that 2024 will be a strong year for real estate transactions, just not quite as robust as the last handful of years. Maybe that is a good thing.