There are very few times when one can state with a good degree of certainty what lies ahead. The present is one of them. Absent some outside event which would disrupt markets in global fashion, real estate prices will continue to climb at a faster-than-usual and steady pace.
Why? It’s quite simple, actually. Rates are likely staying high. People with cheap mortgages don’t want to move. That means a shortage of home inventory. And that means higher prices.
When I wrote on this in August 2023, the mortgage-rate lock in effect had recently hit analyst’s brains. Now there’s data quantifying the impact.
A New FHFA Study Quantifies The Effect
The Federal Housing Finance Authority (FHFA) recently published a 59-page study documenting the lock-in effect. The paper’s abstract contains the goodies:
1. “Findings reveal that each percentage point that market rates [that is, currently available mortgage rates] exceed existing fixed rates [outstanding mortgages homeowners hold] reduces sale probability by 18.1%.”
2. “This lock-in [effect] prevented 1.72 million transactions from second quarter 2022 to second quarter 2024 and increased home prices by 7.0%.”
On the first point, lets look at current mortgage rates. With the 10-Year U.S. Treasury (off of which mortgage rates are priced) at 4.55% as of the December 19 close, that puts average mortgage rates around 7.20%. And with so many outstanding mortgages between 3.00% and 4.00%, the reduced probability of sale is not 18.1% but more than double that – closer to 40%+ (remember, reduced sale probability of 18.1% for every percentage point difference). Why? Nobody wants to move when they have 3.00% locked in now, and face 7.20% in a new home.
This effect dramatically reduces supply and will continue as long as cheap mortgages are outstanding and current rates high. The FHFA study also finds (in point 2 above) that this reduced supply increased prices over a two-year period between Q2 2022 and Q2 2024 by 7.0%.
But Aren’t Rates Supposed to Be Falling?
What about rates? Aren’t they supposed to be falling? As I wrote here over a year ago, don’t count on it. Not only did the Fed’s 50 basis point cut have no downward impact on mortgage rates, they’ve trended higher.
Why?
The market expects a couple of things: the new administration’s tax cuts and tariffs will prove overstimulative and inflationary (tax cuts are fiscal stimulus; tariffs increase consumer prices), and right now, the last thing the economy needs is stimulus. Inflation, the market also recognizes, is tamed, but not conquered. With overstimulative policies on the way and inflation not obliterated, bond markets see high rates ahead.
And markets are usually right.
The Bloomberg screenshot below (taken a few weeks ago; I’m lazy) shows the trendline of the yield on the 10-year U.S. treasury rising since the first Federal Reserve rate cuts, and it’s even higher today, at 4.55%.
Trendline of U.S. 10-Year Treasury Yields since the September 2024 Fed Rate Cut
What derails this scenario? Much lower rates. That is quite literally the only thing that will. So if there is some giant global shock on the scale of September 11, the Great Financial Crisis, or COVID that threatens to tank entire economies, central banks might resume the old game of cutting rates to zero by buying up every bond in sight. In my view the central banks have hit the bottle like this too many times, and those mechanisms may not be available like they once were, so even with a huge shock, rates are very likely not going where they were again.
With a relatively high degree of certainty (80%), then, national real estate prices will continue to climb because of ever-tighter supply. Yes, there’s roughly a 1 in 5 chance that something breaks in the other direction and things get funky. It could happen! But don’t count on it.
So if you want to know what residential prices will do in Santa Fe and nationally, look at the 10-year treasury yield. If it stays between 3.80% and 4.80% or so, supply will stay tight overall, and prices will climb. Period. And buyers who pay cash benefit from these realities without having to endure the jump in rates.
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