Mortgage rates are holding steady around 6.5% to 7% for conventional financing.  The market has definitely priced in the Federal Reserve’s recent rate hikes and most likely at least one future hike.  As mentioned before the average mortgage rate over the past 35 years has been 7.5%, so we truly are returning back to baseline.  It appears that the loose monetary party is over for now and the hangover the next morning isn’t too bad. Guess we all learned some valuable lessons from the financial crisis of 2008/2009.

The Mortgage Bankers Association recently released their forecast for 2023.  They are expecting a slow drop to 5.2% by the end of the year which continues in 2024 to the 4.5% range.  Their reasoning is that economic growth rate will slow down some as the Federal Reserve tightens up.  This will send investors scrambling back into the safety of government bonds.  We all know that this demand will boost bond prices and lead to lower yields which will bring down the prime rate.  As Fund managers we are not completely on board with this forecast but do think mortgage rates will remain pretty steady and in line with historical norms for near- and mid-term future languishing around six percent into 2024 with the occasional dip into the upper-five percent range.

Now for most of our California markets the lack of inventory continues to write the story (except for San Francisco and the Bay-area which are down 5 to 10 percent with the combination of tech layoffs & homeless issues.)  Homeowners are only listing their homes if they must sell!  In high-end markets where working professionals tend to move for employment the levels are even lower.  These homeowners have locked in super low rates and are choosing to rent out their homes for $10,000+ a month rather than sell.  This way they have a property to return to later and are enjoying significant cash flow.   The National data is also telling the same story. 

The chart below summarizes data points from CoreLogic, Black Knight, Case Shiller & the Federal Housing Finance Agency.  Month-over-month home price changes are holding relatively steady.  Nataliya Polkovnichenko, Ph.D., Supervisory Economist at the Federal Housing Finance Agency (FHFA), says:

“U.S. house prices were largely unchanged in the last four months and remained near the peak levels reached over the summer of 2022. While higher mortgage rates have suppressed demand, low inventories of homes for sale have helped maintain relatively flat house prices.”