The Big Story
Sellers are coming back to the market
Quick Take:
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After the election of Donald J. Trump, bond prices increased in anticipation of his inflationary policy positions. Interest rates are the most significant factor financially in purchasing a home for most buyers, and as we’ve seen over the past two years, higher rates translate to lower sales.
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From October 1 – November 7, the average 30-year mortgage rate rose 71 bps, landing at 6.79%. The Fed cut rates by 50 bps in September and another 25 bps during the Fed’s November 6-7 meeting.
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Sales declined 1.0% month over month, falling to the lowest level in modern history, while inventory rose to its highest level since 2020. The spike in mortgage rates should further slow the market in the winter months.
Note: You can find the charts & graphs for the Big Story at the end of the following section.
*National Association of REALTORS® data is released two months behind, so we estimate the most recent month’s data when possible and appropriate.
Bond and mortgage rates are risings as the Fed is cutting rates
Let’s talk about rates. The benchmark 10-year Treasury rate rose by as much as 18 basis points the day after the election, pushing the overall rate on the bond to 4.47%. The price of bonds and their yield move inversely, with prices falling as rates rise. For example, if you have a $100 bond paying 10% and then rates rise to 20%, the original $100 at 10% becomes less valuable because now investors could get a $100 bond that pays 20%. A rising yield on Treasury bonds raises the cost of the U.S. federal government when it borrows new money or rolls over existing debts. In short, the cost of borrowing increases and, therefore, more money is needed to pay interest rather than paying for tangible government programs. The 30-year mortgage rate trends with the 10-year Treasury rate, usually about 2% higher. As of November 7, 2024, the average 30-year mortgage rate was 6.79%, a significant increase from 6.08% at the end of September. In just over a month’s time, the monthly payment on a $500,000 loan increased 7.7%.
But the question you may be asking is, why did rates go up even in the wake of the Fed cutting the federal funds rate? Real interest rate returns account for inflation, so the $100 bond at the nominal rate of 10% can be rewritten as 10% minus inflation (currently 2.4%) to get the real return of the investment. If inflation is expected to rise, the nominal rate can increase, so real return is unaffected or, at least, less affected,, in which case real return would decrease. Trump’s economic plans are inflationary and, therefore, increase rates. The U.S. economy is operating at close to capacity, and unemployment is low. Tax cuts will increase demand, but higher tariffs will push up prices. The U.S. is a net importer, so blanket tariffs will drive up the prices of an incredible number of day-to-day goods. Higher inflation will result, meaning the Federal Reserve will be more cautious about cutting interest rates.
Currently, mortgage rates rise higher when the housing market already tends to slow. Typically, the holiday season experiences fewer sales then picks up again in January. A month ago, rates were dropping, and we were extremely bullish on the spring market. However, if rates rise above 7% or higher, the market will be slower than usual. Since the market has already been slower than usual, a further slowdown coupled with higher inflation would likely slow price growth next year.
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. 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:
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The median single-family home price declined in October, which is normal in the fourth quarter. We expect price contractions through January 2025, which is the seasonal norm.
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Inventory has doubled since the beginning of 2024. More homes on the market only benefits Orange County, which has been extremely undersupplied for the past four years.
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Months of Supply Inventory has trended upward since May and rose above three months of supply last month, indicating the market has shifted from a sellers’ market to a balanced market. Homes are still selling quickly, but Days on Market is moving slightly higher.
Note: You can find the charts/graphs for the Local Lowdown at the end of this section.
The median single-family home price fell but is still near all-time highs
In Orange County, single-family home prices hit a record high in June 2024, reaching $1.45 million. High demand relative to the low, but growing, inventory has kept prices moving higher even during a time of elevated mortgage rates. High mortgage rates have really only slowed the market, rather than decreasing the sticker price of homes. Prices in Southern California generally haven’t experienced larger drops due to higher mortgage rates. October saw the 16th consecutive month of year-over-year price growth for single-family homes. Prices typically peak in the summer months, and the mild contraction after the post-summer peak has fallen in line with expectations. Home prices will likely continue to decline slightly for the next three months.
High mortgage rates soften both supply and demand, but home buyers and sellers seemed to tolerate rates near 6% much more than around 7%. Mortgage rates fell significantly from May through September, but rose significantly in October. Now, rates are far closer to 7% than 6%, so we expect sales to slow further.
Inventory declined month over month after increasing for eight months straight
Total inventory in Orange County fell 85% from July 2019 to January 2022 before building again as mortgage rates rose, pricing potential buyers out of the market. Low inventory and new listings, coupled with high mortgage rates, have led to a substantial drop in sales and a generally slower housing market. Typically, inventory begins to increase in January or February, peaking in July or August before declining once again from the summer months to the winter. In 2023, inventory patterns didn’t resemble the typical seasonal inventory peaks and valleys.
It’s looking like 2024 inventory, sales, and new listings will resemble historically seasonal patterns, but at a depressed level. Even though inventory has doubled from January 2024 to October 2024, it’s still 14% below pre-pandemic levels. Inventory likely peaked in September, having fallen month over month. The volatility around rates, along with seasonality, has caused buyers to hold off on entering the market in the fall.
Months of Supply Inventory in October indicated that the Orange County housing market was balanced
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). MSI has been below three months since February 2023, but it rose to 3.1 months of supply in September 2024. In October, MSI fell slightly to three months of supply, implying the market was balanced.
Local Lowdown Data
