According to Zillow, low mortgage rates could lead to a busy season for home buying this fall. “Low mortgage rates and rising share prices offer home buyers an opportunity at an unusual time of year,” the listings giant said.
Inventory Still Down From Pre-Pandemic Levels
Zillow reported that active inventory nationwide increased 22% year-over-year in August, although it remained 31% lower than the pre-pandemic level of August 2019. Meanwhile, new listings grew slightly month-over-month and year-over-year but were 21% lower than the same month. in 2019.
In a separate report, Zillow reported that in contrast to the rising rate, where renting was cheaper than buying, the opposite is true in 22 of the 50 largest US metros. New Orleans, Chicago, and Pittsburgh offer significant savings when comparing rent and mortgage payments, assuming a buyer typically buys with a 20% down payment.
Zillow Home Loans chief economist Orphe Divounguy said:
This analysis shows that home ownership may be more affordable than many renters think. Coming up with a down payment is still a big hurdle, but for those who can make it work, homeownership can come with lower monthly costs and the ability to build long-term wealth in the form of home equity—something you lose as a renter. With mortgage rates falling, it’s a good time to see how your affordability has changed and whether it makes more sense to buy than rent.
5.25% is the Magic Number
The Wall Street Journalciting Moody’s Analytics, wrote that a 30-year fixed mortgage would have to come down to 5.25% before the monthly payment on a $419,000 home would break even at the average US rent of $1,840.
According to a report by Realtor.com, the majority of home buying activity this fall can be seen in expensive cities in California and/or on the East Coast, where rate cuts can have the biggest impact on monthly mortgage payments.
Many economists differ on how busy a bear market can be. Although the Fed’s rate cut by half a point makes sense, as the market expected it earlier and adjusted accordingly, many people feel that it will be 2025, especially in the spring, when buying and selling is in high gear.
“We have to go back to pre-pandemic conditions,” said Selma Hepp, CoreLogic’s chief economist, in an interview. USA Today. “The need for pent-up is there, but the lower the rate, the better.”
One of the biggest factors influencing the level of activity depends on the available inventory and housing prices. According to the latest S&P CoreLogic Case-Shiller Home Price Index, which ended in June, US home prices posted an annual gain of 5.4%, making purchases still out of reach for many would-be homeowners and investors despite recent price declines.
“Increasing pressure on home prices is making this the most affordable housing market on record,” said Lisa Sturtevant, chief economist at Bright MLS, in her analysis.
“For it to have the best effect, we’re going to have to start seeing the inventory of homes for sale get much higher,” Keith Gumbinger, vice president at Internet company HSH.com, said in a statement. USA Today the subject. “This additional inventory, in turn, will ease the upward pressure on house prices, holding them down or helping them retreat slightly from or near high levels.”
Cutting Prices Too Quickly Can Have a Bad Effect
While many investors are hoping for more rate cuts, too much too soon could cause a housing market boom that could be harmful to both buyers and investors, leading to higher costs that could wipe out any increase in assets. It’s a double-edged sword because low interest rates will allow price-locked homeowners to sell and thus build more inventory. However, if prices fall too much, prices will rise.
According to Freddie Mac’s latest report, inventory shortages remain below pre-pandemic levels for now.
“I don’t expect to see a significant increase in the supply of existing homes for sale until mortgage rates have dropped to the low 5% range, so probably not until 2024,” said Rick Sharga, founder and CEO of the CJ Patrick Company. , told a market intelligence firm and business consultants Forbes.
Real Estate Investors Can See Immediate Relief
The Fed’s rate cut directly affects real estate investors with adjustable-rate mortgages, as shown in short-term rates, such as SOFR or prime. Low rates also increase liquidity throughout the financial system.
“With prices rising faster and higher than in recent memory, liquidity coverage for most deals has gotten better,” said Al Brooks, head of real estate for JPMorgan Chase, on the company’s website. “As a result, real estate lenders have had to pull more money out of their portfolios.”
“As the interest rate decreases, the income increases, reducing the amount reserved for the loss of the loan from the banks,” continued Brooks. “Lower reserves can be put back into the market and facilitate the flow of deals.”
Therefore, it will be easier for real estate borrowers to get loans from banks. Even if the prices are not where investors want, they are looking for opportunities and start negotiations with lenders in advance, in anticipation of further reductions in prices, it is probably a good idea, considering how long real estate deals can take to close, to prove more information. inspections, lease audits, and financing. Brooks advises that low rates can be a good time for commercial investors with mortgages nearing the end of their term to get lower payments again, save on interest, and free up cash for renovations or buying more real estate.
Final thoughts
If ever there was a time to buy and hold real estate, now is now. As the Fed indicates that 18 months of rate cuts are ahead and rates may rise with increasing affordability, buying now and selling when this happens is expected to be profitable, even if the amount of activity is small. Of course, it means buying the right one—regardless of the asset class—and not overpaying.
Regardless of your investment choices—business, real estate, swaps, or buy and hold—buying this fall should prove a valuable move before the next price cut.
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