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I think it’s appropriate to quote Warren Buffett: “Never bet against America”.
Nationally
I’ll also add that all of the emphasis will be on Orange County real estate. There are areas that have had some softening like the desert and the bay area.
Jerome Powell may have successfully achieved the soft landing at least within Orange County. Employment is still high. Wage growth has leveled off. The fed appears to be done hiking rates. This has afforded lenders to shrink their margin between the 10 year treasury and their mortgage rates because the Federal Reserve has indicated that they’re done increasing rates. Inventory is still generally low. Buyer demand is low. This is continuing to prop up pricing.
Local Market
What we expect to happen is as follows. As interest rates continue to come down, we expect to see more sellers come to market as they decide that they’re willing to take on, what is likely, a higher mortgage rate than what they currently have. Buyers who have been on the sideline waiting for affordability to increase either via pricing coming down, rates coming down or their wage growth, are now available to get in with lower rates.
This presents a bit of an odd position because as prices hold steady and rates come down, this actually improves affordability aka decreases the buyer’s monthly payment. I’m going to circle back to my Warren Buffett quote: “Never bet against America”. Interest rates coming down can provide justification for an increase in pricing. Given how poor current affordability is right now, I don’t expect pricing to go up exactly in line with rates coming down. However, if a difference of one point in an interest rate means a difference in payment by 10%, I think we have justification for as much as a 10% increase assuming rates continue to come down. Rates peaked towards the end of October/beginning of November. We’re already down by nearly 1.5 percent. That 10% increase should already be sitting and waiting for us.
With affordability as low as it is right now, I suspect that we will have positive price growth somewhere between 3-10%. This is assuming that employment stays roughly where it is and we don’t see a massive change in wages.
Variability in Price Points
We might see variability in how different markets are affected by this. With higher priced transactions correlated with cash, not sure we will see a significant jump in the higher priced markets. A lot of the higher priced markets have been somewhat immune to affect of higher rates.
However, the first time home buyers who have been sitting on the sidelines waiting for a great opportunity, they’re more inclined to jump into the market. We also have the population of move up buyers who might be more inclined to move for a growing family or changing needs. The move up buyers ought to provide inventory.
The Big Takeaway
The big take away: we still ought to have growth for 2024. However, the likelihood that it will match anything that we saw through COVID is probably very low. It appears that we’re moving back to business as usual for real estate. Like I said at the top “Never bet against America”.
