Housing market shows signs of life after mortgage rates fall

Even before the Federal Reserve has begun cutting interest rates, the mere anticipation of such moves is already thawing the US housing market.

A series of reports this week showed activity coming back to life: Housing starts surged to a six-month high, sales of previously owned homes picked up from a 13-year low and builder optimism was boosted by increased interest from prospective buyers. Meanwhile, Americans' home-buying plans rose this month by the most in more than a year.

The bounceback comes as mortgage rates have declined by more than one percentage point in eight weeks, the biggest drop over a comparable period since 2009. While the Fed last week signaled it's finished its run of rate hikes and is preparing to cut in 2024, investors had already been scooping up Treasuries, driving down yields along with borrowing costs — such as mortgage rates — that tend to reflect fluctuations in the bond market.

"There are definitely green shoots on the housing front," said Charlie Dougherty, senior economist at Wells Fargo & Co. "You're already starting to see the effects of lower expected interest rates boosting a lot of different facets of the housing market."

Even though the overall pace of activity remains subdued compared to the pre-pandemic period, the recent data highlight that consumers are starting to dip their toes back into the market and builders are revving up construction.

Perhaps the biggest case for optimism is the expectation from economists and markets that the Fed will ease policy next year after an aggressive 16-months-long hiking campaign.

The decline in mortgage rates should start spurring some homeowners to list their homes in the coming months, according to Lawrence Yun, chief economist for the National Association of Realtors, as supply remains an issue. Mortgage rates approached 8% in October, the highest in over two decades. But nearly two-thirds of owners have a mortgage rate below 4%, making it unappealing to sell their current home.

Back to 2019 Levels

Chad Reeves, who runs a Keller Williams brokerage location in Gwinnett County, Georgia, says his office is on pace to sell 200 homes this month. That's higher than the same month last year, and around the same level as December 2019 before the pandemic hit.

He saw the impact from the decline in mortgage rates first-hand. The average rate for a 30-year fixed mortgage slid for the fifth straight week to 6.83% in the week ended Dec. 15, the lowest since June, and it's expected to fall further as the Fed cuts their overnight lending rate. 

"The minute that rate came down into the sixes, we had numerous people," Reeves said. "The buyer market filled back up."

The path forward rests largely on consumers, and by many indications, they're ending the year on a more jubilant note. Confidence skyrocketed by the most since early 2021 in the Conference Board's survey for December as the outlook for jobs and inflation improved. 

It's the latest of surveys indicating that consumers — while still concerned about high prices — see the pace of price growth cooling and the broader economy improving.

The pace of homebuying may remain subdued unless inventory is significantly freed up. The lack of available properties pushed home prices 4% higher in November, the most in a year, and NAR data showed sold properties were on the market for less than a month, a sign of high demand.

Still, some economists see the improvement in housing filtering through into economic activity next year. Goldman Sachs Group boosted its fourth-quarter economic growth estimates to 1.7% this week.

For now, the brighter outlook for borrowing costs and lack of supply creates an ideal set-up for homebuilders. US homebuilder stocks outperformed the S&P 500 index so far this month. 

Sales are up 20% this year for Willy Nunn, who's president of homebuilding company Homes by WestBay near Tampa, Florida, helped in part by fewer supply chain problems than last year. While it's still below what he called the "pandemic mania" when rates plunged, he still characterizes the current pace as strong.

"We're building up to a huge spring," Nunn said. "Website traffic looks really positive," indicating pent-up demand is coming out, he said.