I recently saw an article on Bloomberg stating (from a perfectly credible source) that mortgage rates will have to decline to 5% in order to unlock significant supply in the housing market. Two assumptions underlay this article, which I won’t link to: 1) mortgage rates will decline to 5% in the medium term and 2) supply in the housing market will be unlocked during the same period.
Neither is an assumption that I can back up with any real data. In fact, my view is that it may not happen at all.
Former U.S. Treasury secretary Larry Summers’ outlook is that long-term rates will hover around 4.75% over the next decade (the 10-year U.S. Treasury note closed at 4.25% on Friday) and it’s underpinned by real data — not to mention the fact that he is among the most respected financial minds in the country. What’s behind Summer’s view of a 4.75% 10-year?
To paraphrase:
- Inflation, which he said is likely to trend at a faster pace than in the past, perhaps 2.5%.
- The need for more defense spending, likelihood of some Trump administration tax cuts getting extended and higher average interest costs on outstanding debt.
- The usual term compensation investors get for buying a longer bonds rather than rolling over investments in short-term ones.
If the 10-year stays around 4.75%, mortgage rates will remain around 7% to 8%.
Read the Summers interview here: https://tinyurl.com/10-YrUST/
Hang on a minute.
I’m in the real estate business, and it’s perhaps a bit odd that I am seemingly telling people that rates will remain high for the foreseeable future. Well, as (credible) economists are fond of saying, nobody knows what will happen. I certainly don’t. There could be some sort of exogenous shock to the economy (as there was in September 2001 or during the worst of the covid crisis) that upends these assumptions and drives rates down. Barring that, let’s look at what this means for home sellers and buyers.
If mortgage rates remain in a 7 to 8% range, housing supply will very likely remain constrained (to what extent, again, no one knows) by the mortgage-rate lock-in effect, which keeps homeowners in their homes. Constrained supply contributes to firm prices. So even as sales volumes decline, pricing may remain relatively firm. That’s what’s happening now in Santa Fe and northern NM. We see it everywhere. Over time, though, as the shock of higher rates wears away, this effect may subside a bit.
For buyers, lower volumes mean more balance in negotiations. Inspections that were once waived are happening again, and four-bidder offers are something of a memory. As buyers contemplate the fact that they may pay (over time) $75,000 more in interest on a mortgage, those same buyers may save $75,000 in the purchase process. That’s a tangible benefit of the slowdown.
What can we conclude?
The former Treasury chief highlighted that many elements apparent today suggest that “the economy is in a different era.” With markedly lower supply and mortgage rates “higher for longer,” the housing market may be heading into a new era too. And what will that mean? It’d be reasonable to watch new-home building activity as builders seek to fill the supply gap. It’d be worth watching land and lot sales for the same reason. And it’d also be wise to look at to what extent sellers with low-rate mortgages prove more willing to sell over time.
See my Sotheby’s page at https://www.walkerstewartsantafe.com
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