The Big Story:
Mortgage rates increased in February, but their strong effect on the market may be waning
Quick Take:
- Mortgage rates rose in February, closing the month at 6.94%. However, the Fed will almost certainly cut rates at some point this year, so potential homebuyers would only need to service the current rate level for a short period of time before refinancing.
- Sales increased 3% month over month, which, although still low, is a sizable increase. More homes are coming to the market and quickly translating to more sales. Inventory increased 2%, as new listings rose by 25%. More supply and growing demand are good for the market, especially this time of year — right before the busier spring and summer seasons.
- Months of Supply Inventory (MSI), which expresses the supply & demand dynamic, fell over the past three months, indicating the market is getting more competitive for buyers.
Note: You skip to the San Francisco data, charts & graphs by clicking here...
Near-term refinancing could relieve current rate woes
On March 6, 2024, Federal Reserve Chair Jerome Powell delivered remarks before the House Financial Services Committee regarding the Fed’s stance on inflation and the likelihood of rate cuts. In short, rate cuts are coming soon but not too soon. Essentially, the Fed is waiting for more positive inflation data before cutting rates, and cuts will almost certainly come sometime this year. At the start of the year, financial markets were speculating that rate cuts would begin after the Fed’s March meeting, but, with the information from Mr. Powell, we are now expecting rate reductions after the June or July Fed meetings. The Feds strategy makes sense: the benefits of waiting for more information outweigh the potentially negative effects of cutting rates in March only to raise them again in June. The Fed’s dual mandate aims for stable prices (inflation ~2%) and low unemployment. Employment is solid with unemployment at 3.9%, and the February jobs report showed that the labor market added 275,000 non-farm payroll jobs, considerably beating analyst expectations of 200,000. Unless something truly disastrous happens in the labor market, inflation is the primary factor in the Fed’s decision making in the first half of 2024.
The good news for the housing market is that potential home buyers and sellers have a much clearer picture of where rates will go in the next 12 months. The bad news is that rates likely won’t meaningfully decrease until after what is traditionally the most active time in the housing market (March to August). However, because we know there is a high probability of mortgage rates declining this year, home buyers could easily decide to buy now and refinance in the near future. The average 30-year mortgage rate has been above 6% since September 2022, and the housing market has been slower, especially on the selling side, which of course feeds into the buying side, since buyers can’t purchase what's not for sale. The rate-induced market slowdown has given potential buyers more time for a down payment. Many buyers were priced out of the market in the second half of 2022 but have now had over a year to save more money for a down payment. Buyers and sellers are also a little more accustomed to higher rates so aren’t as emotionally tied to the sub-3% mortgage rates seen in 2020 and 2021. We expect the market to heat up more than it did last year because of these factors and aren't so worried about buyer demand because it’s high relative to supply so more sellers could definitely come to the market.
Different regions and individual houses vary from the broad national trends, so we’ve included a Local Lowdown below to provide you with in-depth coverage for your area. In general, higher priced regions (the West and Northeast) have been hit harder by mortgage rate hikes than less expensive markets (the South and Midwest) because of the absolute dollar cost of the rate hikes and limited ability to build new homes. As always, we will continue to monitor the housing and economic markets to best guide you in buying or selling your home.
Big Story Data
The San Francisco Local Lowdown:
The median single-family home and condo prices rose meaningfully from December 2023 to February 2024, up 14.1% and 17.9%, respectively.
Quick Take:
- The median single-family home and condo prices rose meaningfully from December 2023 to February 2024, up 14.1% and 17.9%, respectively. Year-over-year prices also appreciated, up 13.0% for single-family homes and 2.3% for condos.
- Active listings in San Francisco fell 1% month over month. Both single-family home and condo inventory hit record lows, as sales increased and new listings fell.
- Months of Supply Inventory fell from January to February 2024, indicating buyer competition is ramping up. MSI implies a sellers’ market for single-family homes and a balanced market for condos.
Note: You can find the charts/graphs for the Local Lowdown at the end of this section.
Median prices rose in February 2024 for single-family homes and condos
In San Francisco, home prices haven’t been largely affected by rising mortgage rates after the initial period of price correction from May 2022 to July 2022. Since July 2022, the median single-family home and condo prices have hovered around $1.5 million and $1.2 million, respectively. Month over month, in February 2024, the median single-family home and condo prices both rose 8%. Year over year, the median prices were up 13% for single-family homes and 2% for condos. We expect prices to rise as more sellers come to the market. Additionally, inventory is so low that rising supply will only increase prices as buyers are better able to find the best match. More homes must come to the market in the spring and summer to get anything close to a healthy market.
High mortgage rates soften both supply and demand, but at this point rates have been above 6% for 15 months, and rate cuts will likely occur sometime this year. Potential buyers have had longer to save for a down payment and will have the opportunity to refinance in the next 12-24 months, which makes current rates less of a limiting factor. However, high demand can only do so much for the market if there isn’t supply to meet it.
Single-family home and condo inventory hit all-time lows for the third month in a row
Since the start of 2023, single-family home inventory has followed fairly typical seasonal trends, but at a significantly depressed level, while condo inventory has been in decline since May 2022. Low inventory and fewer new listings have slowed the market considerably. Typically, inventory peaks in July or August and declines through December or January, but the lack of new listings prevented meaningful inventory growth. Last year, sales peaked in May, while new listings and inventory peaked in September. New listings have been exceptionally low, so the little inventory growth throughout the year was driven by fewer sales. In November and December, new listings dropped significantly without a proportional drop in sales, causing inventory to fall to an all-time low, which further highlights how unusual inventory patterns have been over the past year. However, in January 2024, new listings rose nearly 115% month over month after hitting a record low number of new listings coming to market in December. New listings still couldn’t keep up with sales in January, however, and inventory declined further.
New listings in January led to a 64% sales increase in February. With the current low inventory levels, the number of new listings coming to market is a significant predictor of sales. Year over year, inventory is down 22%; however, sales are up 37%. The next three months will be critical to our understanding of the market. More supply will mean a healthier market and a more normal housing market in 2024.
Months of Supply Inventory in February 2024 indicated a sellers’ market
Months of Supply Inventory (MSI) quantifies the supply/demand relationship by measuring how many months it would take for all current homes listed on the market to sell at the current rate of sales. The long-term average MSI is around three months in California, which indicates a balanced market. An MSI lower than three indicates that there are more buyers than sellers on the market (meaning it’s a sellers’ market), while a higher MSI indicates there are more sellers than buyers (meaning it’s a buyers’ market).The San Francisco market tends to favor sellers, at least for single-family homes, which is reflected in its low MSI. However, we’ve seen over the past 12 months that this isn’t always the case. MSI has been volatile, moving between a buyers’ and sellers’ market throughout the year. In February, MSI declined, indicating that single-family homes shifted from balanced to favoring sellers, and condos moved from favoring buyers to balanced.
We can also use percent of list price received as another indicator for supply and demand. Typically, in a calendar year, sellers receive the lowest percentage of list price during the winter months, when demand is lowest. Winter months tend to have the lowest average sale price (SP) to list price (LP), and the summer months tend to have the highest SP/LP. The February 2024 SP/LP was 4% higher than last year, meaning we expect sellers overall to receive a higher percentage of the list price throughout all of 2024 than they did in 2023.
Local Lowdown Data
