Interest Rates Juicing the Market

Historically low rates have led to the Expected Market Time dropping to 38 days, the lowest level for this time of year since tracking began in 2012. 

For Los Angeles Angels fans, prior to 2002, it seemed that their team would never make the World Series. The Major League Baseball franchise was founded in 1961, and it took them 41 years until they reached the pinnacle games. They had only earned 3 trips to the playoffs prior. As a fan, there were more losing games than winning games, so any vision of hoisting the World Series Commissioner’s Trophy was more of a daydream. There was no light at the end of the tunnel, until the Angels made the playoffs with a wild card berth in 2002. They became only the second team ever to win their solo World Series appearance.

Similarly, for buyers waiting for the market to slow and turn more favorably towards the home shopper, there seems to be no light at the end of tunnel. Housing has lined up in favor of sellers since 2012. Many thought that the pandemic would slow housing, create a deep recession, and erode home values, giving buyers that much desired edge. Instead, rates plummeted to record lows, demand escalated, the inventory of homes available plummeted to unfathomable depths, and home values soared to unbelievable heights. The pandemic led economic recession lasted only two months, and it did not touch the housing industry.

Values have climbed more than 20% year-over-year and the pace of Los Angeles County housing has not slowed much at all this year. The Expected Market Time (the amount of time between hammering in the FOR-SALE sign and opening escrow) is currently at 38 days, an unbelievably Hot Seller’s Market. A Hot Seller’s Market is defined as a market time below 60-days, the lower the level, the hotter the market. At 38-days, the market remains insane with plenty of showings, multiple offers, and sales prices above their list prices. At this point, what will decelerate the market enough to allow housing to transition away from a Hot Seller’s Market to a Slight Seller’s Market, Balanced Market, or even a Buyer’s Market? Rising mortgage rates. That is precisely what occurred in 2013 and 2018.

Like today, in 2013 there was a very limited supply of available homes to purchase, a supply crisis with less than 8,500 homes available. Market time was at a very low, insane level, below 40-days during the Winter Market. The inventory remained at a low level until it started to climb in April. It continued to climb until reaching a late peak in October at 12,964 homes, increasing by two-thirds from the low 7,717 level in March. What changed? Mortgage rates. They started 2013 at just over 3.25%, eclipsed 4% in June, and surpassed 4.5% in September.

When rates rise, many buyers turn their collective noses away from pursuing a home because monthly mortgage payments rise, and affordability diminishes. As a result, the inventory rises with fewer buyers in the marketplace, and the Expected Market Time rises as well. It takes longer to sell with increased seller competition. In 2013, demand dropped by 26% from its peak at the end of April to October, the inventory increased by two-thirds from its March lows, and the market time increased from 39 days in March to 81 days in October, a Slight Seller’s Market. That is a market with an Expected Market Time between 60 and 90 days, there are fewer showings than a Hot Seller’s Market, far fewer multiple offer situations, sellers still get to call the shots, and home values are not appreciating much at all. It is not a Buyer’s Market, but a market where buyers are not kicking and clawing their way to homeownership.

Similarly, in 2018 there was a supply crisis to start the year with less than 8,500 homes available. Yet, this time interest rates rose rapidly from 4% at the start of January to nearly 4.5% by March. It did not stop there either, making its way to almost 5% by November. With rapidly rising rates, demand was muted during the Spring Market, off by 13% compared to the prior 3-year average. Demand dropped by 23% from its peak in June to the start of November, the inventory increased by 82% from the start of the year to its peak in November, and the market time increased from 54 days in April to 101 days to start November, a Balanced Market. A Balanced Market has an Expected Market Time between 90 and 120 days, does not favor buyers or sellers, and values do not change much at all.

This year there really has been no relief in the relentless pace of real estate due to the historically low mortgage rate environment. According to Freddie Mac’s Primary Mortgage Market Survey®, mortgage rates have risen to 3.14% the highest level since March. For proper perspective, after the start of the pandemic, rates reached 17 record lows, the 17th was during the first week of January of this year at 2.65%. Yes, rates have risen from there, but keep in mind that prior to the pandemic, today’s 3.14% rate would be an all-time low. They remain at very low levels, which is why the active listing inventory is 39% below the 3-year average between 2017 and 2019, prior to the pandemic, demand is 21% higher, and the market time is stuck below 40-days.

For the market to noticeably slow, mortgage rates would need to rise considerably. At 3.5%, it would afford a little bit of relief, but not much. Rates would need to climb to 4% for the market to slow from an insanely Hot Seller’s Market to just a Hot Seller’s Market with market times closer to 60-days. Very few economists project rates to climb above 4%. That is what it would take for the market to move more towards a Buyer’s Market. The market needs to transition first to a Slight Seller’s Market, between 60 and 90 days, then to a Balanced Market, between 90 and 120 days, next to a Slight Buyer’s Market, between 120 and 150 days, and finally, to a Deep Buyer’s Market, greater than 150 days. A Deep Buyer’s Market is one where there are very few showings, a glut of homes available to purchase, very few offers to purchase, buyers get to call all the shots and take their time, and values tumble. That would take a rise in rates to over 4.5%, which is not anticipated to occur anytime on the horizon.

The light at the end of the tunnel with a shift in the market will not occur until mortgage rates rise substantially. Freddie Mac forecasted a couple of weeks ago that mortgage rates will rise to 3.5% in a year from now. That is not quite enough to slow housing meaningfully. Either rates eventually climb to slow housing, or values will climb to the point that they soften demand. The Los Angeles County housing market is just not there yet.