Looking for a housing deal with lower rates? Economists say not so fast

UCI economics professor predicts home price appreciation will continue to rise at 10% per year.

By JEFF LAZERSON | jlazerson@mortgagegrader.com | MortgageGrader.com | July 22, 2024

Article originally posted in Orange County Register on July 11, 2024.

With no recession in sight, the second half of 2024 is going to look a lot like the first half, according to several economists who specialize in the housing market.

Said another way: It will be like watching wet paint dry.

Recently, I spoke with Jordan Levine, chief economist at the California Association of Realtors; Edward Coulson, economics professor and director at the Center for Real Estate at UC Irvine; Christopher Thornberg, founding partner at Beacon Economics; Raymond Sfeir, director of economic research at the A. Gary Anderson Center at Chapman University; and Mark Zandi, chief economist at Moody’s Analytics.

Levine believes the housing market will be bumpy for the rest of the year due to mortgage rate movement and volatility. He sees just one Federal Reserve rate cut this year.

“This is a demand-driven environment. Demand will come back faster than (housing) supply when rates go down,” he said.

Even though borrowers are loath to get rid of low rates, life events start to accumulate. Examples from Levine include having babies, getting married and divorce.

Wages and housing costs have been slow to come down, and the labor market is still tight. Levine predicts mortgage rates will be 6.3% to 6.5% at the end of the year.

As for inventory, he said about 400,000 homes were sold on an annual basis in pre-pandemic California. Last year, that number was 225,000 and slightly better this year at 300,000, so far.

What about the presidential election? Does the outcome have any bearing on housing and mortgages? “No. It’s not statistically significant,” said Levine.

Years ago, I wrote a column wondering the same thing. I found post-election mortgage rates to be a jump ball, regardless of which party won the White House. So, I agree with Levine.

Based on his own research groups’ project, Coulson at UCI believes the inflation rate is zero. “Rents are flat in most of the country,” he said. “The Fed’s data is six to eight months behind. The Fed’s data currently indicates 2-3% inflation.”

He thinks the Fed will drop short-term rates by one-quarter percent, probably in September. And he sees mortgage rates going down by a quarter-percent by the end of the year. Home price appreciation, he predicts, will continue to rise at 10% per year. Wow!

Thornberg at Beacon Economics expects no rate cuts for the remainder of 2024. He sees rates staying in the 7% range and home prices going up slowly. Going forward, he sees things staying pretty much like the last 18 months.

Chapman’s Sfeir thinks mortgage rates will be close to 6.6% by year’s end as the economy continues to hum along. Unless rates drop under 6%, there will be no major change to homes for-sale listings, he believes.

“Expect two rate cuts this year,” said Sfeir. “Inflation is getting better each month. Even with the unemployment rate rising to 4.1%, that is still considered full employment.”

Sfeir, however, is alarmed by credit card interest rates at 22%-23% and driving up to 33% if the consumer is late. “That’s crazy,” he said. “It’s going to hurt. They will consume less.”

On the home front, he says affordability is very bad, especially in Orange County. But home prices are not going to decline nationally or in Orange County.

Sfeir thinks no matter who is elected president, they will have no bearing on housing and real estate except for future policies.

Moody’s Zandi believes the worst is over for (slow) transactions, although he believes home prices will go sideways.

“Nationwide home prices will be flat for the rest of the year. Some areas will experience significant price declines (in the South),” he said. “There will be modest price growth in the Midwest and Northeast. California market will be flat in terms of prices over the next year, as affordability is still a real problem.”

He predicts rates will hover in the 6.5% to 6.75% range by the end of the year. He expects the Fed to drop short-term rates one-quarter point in September and one-quarter point in December. It’s going to be a slow, steady, judiciously lower rates, a steady decline, he told me.

Some people will have to move, according to Zandi, especially those having kids and dealing with life events such as jobs and divorce.

He thinks if Donald Trump is elected, we’ll see higher tariffs, more inflation, fewer immigrants, tax cuts and lower corporate tax rates leading to more inflation and higher tax rates.

Zandi observed there have been no big lender shakeouts yet, given the low activity. If volume increases, lenders may be OK.

So, what do I foresee? Two Fed rate cuts are coming, one in September and one in December. I think mortgage rates will be under 6% by the end of this year, as jobs are cooling and home inventories for sale are rising. I see Southern California homes continuing to move up in value, but at a much slower pace than we’ve seen.

Freddie Mac rate news: The 30-year fixed rate averaged 6.89%, 6 basis points lower than last week. The 15-year fixed rate averaged 6.17%, 8 basis points lower than last week.

The Mortgage Bankers Association reported a .2% mortgage application decrease compared with one week ago.

Bottom line: Assuming a borrower gets the average 30-year-fixed rate on a conforming $766,550 loan, last year’s payment was $36 more than this week’s payment of $5,043.

What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with 1 point: A 30-year FHA at 5.625%, a 15-year conventional at 5.5%, a 30-year conventional at 6.125%, a 15-year conventional high balance at 5.99% ($766,551 to $1,149,825 in LA and OC and $766,551 to $1,006,250 in San Diego), a 30-year high-balance conventional at 6.375% and a jumbo 30-year fixed at 6.75%.

Note: The 30-year FHA conforming loan is limited to loans of $644,000 in the Inland Empire and $766,550 in LA, San Diego, and Orange counties.

Eye-catcher loan program of the week: A 30-year mortgage requiring over 30% down, fixed for five years at 6.125% with 1 point cost.

Jeff Lazerson, president of Mortgage Grader, can be reached at 949-322-8640 or jlazerson@mortgagegrader.com. His website is www.mortgagegrader.com.

If you enjoyed this article and want to receive weekly mortgage news for FREE, sign up for the newsletter HERE. 

* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.