Like the seasons, the real estate market is cyclical. Additionally, winter is usually a time in real estate to hunker down and wait for the spring thaw. For instance, five-year trends will show the casual observer that active and new listings peak in May/June and recede through the summer before reaching low points in November/December. However, these cycles can be invigorated or hampered depending on conditions either directly or indirectly related to the housing market. Recently, we have seen the hampering effect: high interest rates and low inventory push housing prices, especially upfront costs, up, and slow down the market. However, as we move through the winter months, there are reasons for buyer optimism, chiefly for those looking forward to 2024, with a potential for higher inventory levels combined with lower mortgage rates.
Falling Interest Rates
The first and most obvious cause for optimism is falling interest rates. While the days of 2 to 3% rates are long gone, the 23-year highs that we saw in October are also behind us. The average interest rate has declined for six straight weeks as of the week ending on December 8, accounting for an 8% dip in rates. While this is not astronomical, the 8% decrease represented an average rate decline from 7.8% in October to 7.2% in the early weeks of December, and downward movement in that space is beneficial to potential buyers who have been waiting for listing activity to increase so that they can find a home to buy and worry about refinancing their home later.
Market Closings Show Upward Trends
Seasonal inventory is low, leading to an average home price increase of 4.6% in Washington, according to NWMLS’s report on 26 of Washington’s 39 counties. In November, brokers reported 4,367 closed listings, a 16% drop in closings compared to the same month last year. However, even here there is a positive trend. October 2023’s year-to-year comparison with October 2022 saw an 18% decline, showing that November’s numbers represent a 2% market rebound. Current market activity is by no means a bonanza, but there are positive trends that could point to a more active market in 2024. In fact, seven counties in Washington saw increases in the number of homes sold through November.
New Listings Lagging
While closings and mortgage rates show marginal improvements, new listings continue to be the most obvious worry for potential buyers. For many owners who may be ready to sell for any variety of reasons, the idea of moving on from historically low interest rates in the 2 to 4% range to rates in the 6 to 7% range is not that appealing. This has led to hesitance to list their homes in the current market.
However, if rates continue their downward trajectory and head towards 6%, many that have been hanging back may be forced by market pressure to list before an influx of new listings—which are already hitting the market at the national level—drive prices down. While the Washington markets covered by NWMLS may not be feeling the effects quite yet, the national market saw new listings increase by 5.6% in the week ending on December 8, and overall active inventory is up over 3% year-to-year.
The Bottom Line
Housing affordability, mortgage rates, and inventory remain the biggest challenges to our real estate market. However, none of these factors operate independently of each other, and all have a cause-and-effect relationship. That relationship, as basic as it may seem, is exemplified by receding rates leading to increased inventory, which in turn lowers prices. National trends are already feeling this effect. Even the marginal 0.6% rate decrease over the last six weeks has led to an increase in new listings, providing more buyers with more options. What this trend shows is that potential sellers are becoming active ones, which means potential buyers can also become active ones.
Of course, buying a home does not occur at the national level, and in the majority of Washington, active listings decreased by 17% year-to-year. But there is a silver lining: homes lingering on the market have steadily increased overall inventory above that of previous years going back to 2019, excluding 2022. This means that if rates come down, as they are expected to, there is a healthy stock of active listings ready to be bought up by motivated buyers. And if buyers are buying, motivated sellers may want to get in on the action before prices decrease.