The Big Story

Mortgage rates are plummeting, but how far will they fall?

Quick Take:

• Mortgage rates rose in February, closing the month at 6.94%. However, the Fed will almost certainly cut rates at some point this year, so potential homebuyers would only need to service the current rate level for a short period of time before refinancing.
• Sales increased 3% month over month, which, although still low, is a sizable increase. More homes are coming to the market and quickly translating to more sales. Inventory increased 2%, as new listings rose by 25%. More supply and growing demand are good for the market, especially this time of year — right before the busier spring and summer seasons.
• Months of Supply Inventory (MSI), which expresses the supply & demand dynamic, fell over the past three months, indicating the market is getting more competitive for buyers.

Note: You can find the charts & graphs for the Big Story at the end of the following section.

Near-term refinancing could relieve current rate woes

On March 6, 2024, Federal Reserve Chair Jerome Powell delivered remarks before the House Financial Services Committee regarding the Fed’s stance on inflation and the likelihood of rate cuts. In short, rate cuts are coming soon but not too soon. Essentially, the Fed is waiting for more positive inflation data before cutting rates, and cuts will almost certainly come sometime this year. At the start of the year, financial markets were speculating that rate cuts would begin after the Fed’s March meeting, but, with the information from Mr. Powell, we are now expecting rate reductions after the June or July Fed meetings. The Feds strategy makes sense: the benefits of waiting for more information outweigh the potentially negative effects of cutting rates in March only to raise them again in June. The Fed’s dual mandate aims for stable prices (inflation ~2%) and low unemployment. Employment is solid with unemployment at 3.9%, and the February jobs report showed that the labor market added 275,000 non-farm payroll jobs, considerably beating analyst expectations of 200,000. Unless something truly disastrous happens in the labor market, inflation is the primary factor in the Fed’s decision making in the first half of 2024.

The good news for the housing market is that potential home buyers and sellers have a much clearer picture of where rates will go in the next 12 months. The bad news is that rates likely won’t meaningfully decrease until after what is traditionally the most active time in the housing market (March to August). However, because we know there is a high probability of mortgage rates declining this year, home buyers could easily decide to buy now and refinance in the near future. The average 30-year mortgage rate has been above 6% since September 2022, and the housing market has been slower, especially on the selling side, which of course feeds into the buying side, since buyers can’t purchase what's not for sale. The rate-induced market slowdown has given potential buyers more time for a down payment. Many buyers were priced out of the market in the second half of 2022 but have now had over a year to save more money for a down payment. Buyers and sellers are also a little more accustomed to higher rates so aren’t as emotionally tied to the sub-3% mortgage rates seen in 2020 and 2021. We expect the market to heat up more than it did last year because of these factors and aren't so worried about buyer demand because it’s high relative to supply so more sellers could definitely come to the market.

Different regions and individual houses vary from the broad national trends, so we’ve included a Local Lowdown below to provide you with in-depth coverage for your area. In general, higher priced regions (the West and Northeast) have been hit harder by mortgage rate hikes than less expensive markets (the South and Midwest) because of the absolute dollar cost of the rate hikes and limited ability to build new homes. As always, we will continue to monitor the housing and economic markets to best guide you in buying or selling your home.

Big Story Data

The Local Lowdown

Quick Take:

• Single-family home prices appreciated year over year in Santa Clara and Santa Cruz, up 20% and 4%, respectively. We expect prices to remain fairly stable until interest rates drop further and more sellers come to the market.
• Active listings, sales, and new listings rose in Silicon Valley month over month, which are all beneficial for the housing market. We expect inventory to increase in the first half of the year and possibly return to a more normal market after the slowdown experienced over the past year and a half.
• Months of Supply Inventory fell from January to February 2024, indicating buyer competition is ramping up. MSI implies a sellers’ market in Silicon Valley across counties.

Note: You can find the charts/graphs for the Local Lowdown at the end of this section.

Median price movements were mixed across Silicon Valley in February 2024

In Silicon Valley, low inventory and high demand have more than offset the downward price pressure from higher mortgage rates, and prices generally haven’t experienced larger drops due to higher mortgage rates. Month over month, in February, the median single-family home price fell 3% in San Mateo, but rose 5% in both Santa Clara and Santa Cruz. However, year over year, prices were down 7% in San Mateo, while Santa Clara and Santa Cruz prices were up 20% and 4%, respectively. Condo prices were mixed across Silicon Valley both month over month and year over year. We expect prices in Silicon Valley to remain slightly below peak until late spring, but as interest rates decline, prices will almost certainly reach new highs in the first half of 2024 with the exception of single-family homes in San Mateo, where prices are far below peak. Additionally, inventory is so low that rising supply will only increase prices as buyers are better able to find the best match.

High mortgage rates soften both supply and demand, but at this point rates have been above 6% for 15 months, and rate cuts will likely occur sometime this year. Potential buyers have had longer to save for a down payment and will have the opportunity to refinance in the next 12-24 months, which makes current rates less of a limiting factor. However, high demand can only do so much for the market if there isn’t supply to meet it.

Single-family home and condo inventory, sales, and new listings increased month over month

Single-family home and condo inventory barely increased at all last year, which is far from the seasonal norm. In 2023, inventory didn’t have anything resembling the typical sine wave, since far fewer sellers came to the market, especially in the first half of the year, and the low inventory and fewer new listings slowed the market considerably. New listings were exceptionally low, so the little inventory growth last year was driven by softening demand. Typically, inventory peaks in July or August and declines through December or January. However, in 2023, inventory peaked in September, further highlighting the atypical supply trend. During Q4 2023, inventory, sales, and new listings dropped.

Inventory and new listings increased significantly in the first two months of 2024. With the current low inventory levels, the number of new listings coming to market is a significant predictor of sales. New listings increased 22% month over month, and sales increased 36%. Year over year, inventory is down 1%; however, sales and new listings are up 29% and 19%, respectively. The next three months will be critical to our understanding of the market. More supply will mean a healthier market and a more normal housing market in 2024.

Months of Supply Inventory in February 2024 indicated a sellers’ market

Months of Supply Inventory (MSI) quantifies the supply/demand relationship by measuring how many months it would take for all current homes listed on the market to sell at the current rate of sales. The long-term average MSI is around three months in California, which indicates a balanced market. An MSI lower than three indicates that there are more buyers than sellers on the market (meaning it’s a sellers’ market), while a higher MSI indicates there are more sellers than buyers (meaning it’s a buyers’ market). The Silicon Valley market tends to favor sellers, which is reflected in its low MSI. MSI fell sharply in the first quarter of 2023 before gently trending higher from May to November. In December, MSI declined sharply, but rose again in January. MSI contracted once again in February and currently indicates a sellers’ market for both single-family homes and condos.

We can also use percent of list price received as another indicator for supply and demand. Typically, in a calendar year, sellers receive the lowest percentage of list price during the winter months, when demand is lowest. Winter months tend to have the lowest average sale price (SP) to list price (LP), and the summer months tend to have the highest SP/LP. The January and February 2024 SP/LP were 5% and 6% higher than last year, respectively, meaning we expect sellers overall to receive a higher percentage of the list price throughout all of 2024 than they did in 2023.

Local Lowdown Data