Housing Report

Rate Sensitivity

The 7% mortgage rate is a psychological barrier to the housing market.

Airline travel is particularly sensitive to airfare pricing. There are so many online choices to compare fares easily. Travelers quickly jump for more affordable options, even if it means changing traveling dates, accepting layovers, or flying on a red-eye. When airfares spike, many travelers alter or scrap their travel plans altogether. Yet, if fares unexpectedly drop, demand soars, and flights are booked seemingly overnight. The price sensitivity of airline consumers makes it tricky for airlines to fill planes and still earn a profit.

Similarly, prospective buyers are very sensitive to how much their monthly payment will be, which is determined by the prevailing mortgage rate. Home values skyrocketed higher as mortgage rates plunged to record lows from 2020 through the first few months of 2022. That changed as mortgage rates soared from 3.25% at the start of 2022 to 7.37% by October. In 2023, rates climbed from 5.99% in February to 8% in October. They remained above 7% from the end of July 2023 through mid-December. Despite a limited supply, values do not change much when rates climb above 7%. The combination of elevated home prices and the high mortgage rate environment has resulted in an exceptionally rate-sensitive housing market.

The Federal Reserve set out on a course to bring down inflation, which had spiked to 9% by June 2022. Inflation has been an international problem linked to disruptions in the global supply chain and considerable shifts in demand due to the COVID-19 pandemic. The Consumer Price Index has dropped to 3.1% but has a ways to go to hit the Federal Reserve’s 2% target. The Federal Reserve has indicated that they will most likely drop the short-term Federal Funds Rate three times this year. Still, they are very data dependent, meaning they watch every U.S. economic data point, from the number of job openings to consumption to many monthly inflation indicators.

In December, right after indicating that they would be cutting rates in 2024, rates plunged from 7.09% to 6.62%, its lowest rate in seven months. Since then, a series of economic reports suggest that the economy has not entirely cooled enough for the Fed to start its cuts. Many anticipated the cuts to begin as early as March, but now it looks more like June. This change resulted in rates climbing to 7.1%, according to Mortgage News Daily.

The change in rates has cut into home affordability. On February 1st, mortgage rates dropped to nearly 6.5%. Buyers desirous of a $5,000 per month principal and interest payment with 20% down, at 6.5%, would be looking at a $988,750 home. As mortgage rates migrated back up to 7%, those same buyers are now looking at a $940,000 home, nearly $50,000 less of a home.

Excerpt taken from an article by Steven Thomas.

About the Author

The real estate industry continues to evolve, and I pride myself on being on the cutting edge, finding new ways to work with clients to achieve their real estate goals.

My real estate experience coupled with insight of industry trends ensures that I stay one step ahead of other realtors. I enjoy making sense of the complex real estate market in Southern California, and look forward to teaming with you and exceeding your expectations.

My passion for winning stretches back to my time playing professional baseball, and I know that hard work pays off-let me hit a home run for you! I’m committed to delivering your dream home or selling your current property at a winning price.

Affiliations: California association of Realtors, National Association of Realtors, Relocation Specialists.