It is a new year, so it seems a good time to take a look at the housing market and what stands out. And we will have some fun with charts along the way.
As with many things right now, we need to begin by looking at the Fed Funds Rate. The timeframe of analysis is important when considering these charts for the sake of perspective, so here is a 20-year look back:
The correlation between the Fed Funds Rate and the 10-Year Treasury is something to always be aware of. During our last Riffin' on Real Estate call, we talked about the historical move of the 10Y following rate hikes and cuts. While the Fed has control over the short end of the curve, their moves do not always determine what happens at the longer end.
Despite the rate cuts, the average 30-year mortgage rate finished 2024 above 7%. We last saw those numbers in 2001.
This puts a lot of pressure on the economy as rates at this level lock in homeowners and creates stagnation for workers who need to see extreme wage increases to justify moving or re-locating. As a result, this has caused strong home price appreciation over the years with many forecasts predicting continual steady growth in home prices.
Narrowing in by states, you can see that home price appreciation occurred in all 50 states.
And while we have started to see an increase in housing inventory, most of these are in new builds or in smaller homes than in existing inventory where the bulk of housing lies. Without significant increases in wages or decreases in rates, it is hard to see what opens up that "lock-in" effect.
And nowhere is this more apparent than doing a quick comparison between a low mortgage and high mortgage rate environment. Comparing 2024 to 2021, the numbers are stark:
Predictions and forecasts for 2025 do not show much of a change or decrease in housing affordability.
A major component of the mortgage market is in refinancing activity. As one might imagine, since 2020 the refinance market has been pretty low. You can see from the below the demand for refinancing into lower rates based on the slight increase in refinance activity in 2024 when rates dipped slightly in September down to 6.11%.
The real asset for homeowners at this point does seem to be seasoned mortgages. The average outstanding mortgage rate in the country is 3.9%. This is more than a 3% spread between the current mortgage rate on offer.
It remains interesting from an investment standpoint to consider the quality of the collateral when it comes to investing in the housing market and the value of the seasoned mortgages. Based on the volume of new issue mortgage activity, there are few opportunities to invest in new issuance. However, seasoned mortgages and mortgage servicers are quite interesting especially if one thinks that the housing market will continue to appreciate at historic 4-5% averages and that rates will remain high.
2025 promises to be an interesting year!
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