Key takeaways
Mortgage rates dropped to their lowest point of the year, but housing market challenges continue.
In August, existing and new home sales slowed compared to the previous month.
After lagging broader markets in the first half of the year, investors putting money to work in the real estate sector enjoyed solid third quarter gains.
As bond yields across the bond market fell over the summer and the Federal Reserve (Fed) initiated its first interest rate cut since 2020, mortgage rates declined as well. The average 30-year mortgage rate, now at just over 6%, is at its lowest level since early 2023. 1 While that is better news for potential home buyers, it hasn’t yet loosened up what remains a tight housing market.
In late 2023, 30-year mortgage rates reached nearly 8%. Today’s market provides encouraging signs that lower rates lie ahead. Inflation has moderated significantly and the Fed indicated that in 2024 and 2025, it plans further cuts to the federal funds target rate. That should help push mortgage rates in a direction more favorable to homebuyers.
“The housing market is at the epicenter of the economic upheaval caused by prior Fed rate hikes,” says Rob Haworth, senior investment strategy director for U.S. Bank Wealth Management. But he notes that economic trends are another contributing factor. “The strong labor market put potential homebuyers in a better position to afford a house.” However, recent signs of labor market weakness raised concerns for Fed policymakers and others. The ability of potential buyers to afford a home if the job market becomes shakier may have a lingering housing market impact.
Persistently higher mortgage rates were not only a deterrent to potential new homebuyers, but also played a role in reducing supply. Many existing homeowners remained unwilling to put their houses on the market and sacrifice their lower rate mortgage. In May 2024, the average U.S. monthly mortgage payment reached an all-time high, 2 contributing to slower housing market dynamics.
Despite favorable mortgage rate trends, August home sales dropped. Existing home sales declined in August to their lowest levels since October 2023. The current annualized existing home sales rate lags below 4 million. August sales were nearly 12% below the recent peak for existing home sales reached in February. 3 New home sales also fell in August 2024, declining by 4.7% from July. However, August’s new home sales reading was 9.8% above the same month one year earlier, an encouraging trend. 4
“Mortgage rates are still high enough to hamper affordability,” says Haworth. “Still, there clearly is pent-up demand if supplies can expand.” Haworth says affordability remains an issue. “We’re a longways from having an ample supply of affordable homes. Many existing homebuyers continue to hang onto their homes and the low mortgage rate associated with them, and new supply isn’t accelerating significantly.”
Mortgage rates tend to track with general bond yield trends. Fed interest rate decisions don’t have a direct impact on mortgage rates, but may indirectly affect that market if other rates decline across the bond market.
“Housing affordability remains a meaningful problem,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. “Potential homebuyers are being priced out of the market, or they need to save up more to make a larger down payment to keep their mortgage payment reasonable.”
“Today’s mortgage rates reflect higher yields in the bond market, but also a relatively wide premium spread between 10-year U.S. Treasury notes and mortgage rates,” says Haworth. The spread was recently nearly twice what it was in early 2022, contributing to more burdensome mortgage rates. “The wider spread between mortgage rates and Treasury rates reflects a lack of buyers for mortgage-backed securities,” says Haworth. The yield spread declined in July, rose in August and then declined in September to its lowest level since November 2023. 5 However, the spread remains elevated. “Potential buyers of mortgage-backed securities have less money to invest because of a lack of prepayment on older, lower interest rate mortgages,” says Haworth. “With less investor demand, mortgage rates stay elevated.”
Home prices, like those for any product or service, are driven in large part by supply and demand. After Fed rate hikes began, housing demand dipped and prices followed suit, falling between July 2022 and January 2023. Home values recovered modestly from February through October 2023, when prices in the S&P CoreLogic Case-Shiller 20-City Composite Home Price Index reached new, all-time highs. Home prices as measured by the index then slipped in three consecutive months before recovering again beginning in February 2024, setting new all-time highs in consecutive months dating back to March 2024. However, the Index registered only a minimal gain in July compared to June’s results. 6
Another sign of continued housing demand was a jump in September mortgage applications. This activity may be slowly rebounding after mortgage applications for home purchases in 2023 fell to their lowest levels since 1995. In mid-September 2024, the unadjusted Purchase Index for mortgage applications was nearly flat compared to the same week a year earlier. 7 That represents an improvement over where the market stood on a year-over-year basis in prior months.
Rising home prices, combined with higher mortgage rates, make affordability a bigger challenge for many potential buyers. However, improvement in mortgage rates may help reduce mortgage payments. According to the residential real estate brokerage firm Redfin, the median monthly mortgage payment in September 2024 (based on average 30-year mortgage rates and home prices) was $2,534, down from the previous month and 2.7% lower than a year earlier. It represents the biggest year-over-year decline since May 2020. Average monthly housing payments have declined by more than $300 from May’s all-time high. 8 “Housing affordability remains a meaningful problem,” says Haworth. “Potential homebuyers, in many cases, need to save up more to make a larger down payment to keep their mortgage payment reasonable.” Haworth says this could lead to some belt-tightening by consumers, which may slow activity in other parts of the economy.
For those looking to enhance portfolio diversification by including real estate in their asset mix, a commonly used vehicle is a real estate investment trust (REIT). During the same period that higher mortgage rates tightened housing market conditions and negatively affected commercial real estate, REITs dramatically underperformed the broader market. However, recently declining interest rates boosted investor enthusiasm for REITs. For the third quarter (through September 23), the S&P Developed REIT index gained 16.72%, compared to 5.32% for the S&P 500 index. By contrast, in recent years and over 2024’s first half, REITs significantly underperformed the S&P 500.
Year-to-date through September 24, 2024, the S&P Developed REIT index gained 14.33%, compared to the broader S&P 500’s year-to-date total return of 21.43%. Over the 12-months ending August 27, 2024, the S&P 500 gained 34.66% while the Developed REIT index rose 30.47%. 9
Haworth says recent lower REIT valuations likely enticed more investor interest. “Serious challenges in the commercial real estate market remain,” says Haworth, noting that it isn’t clear if REITs’ third quarter recovery is sustainable over the long term.
Fed policy has clearly placed housing and other real estate markets on the front lines of efforts to slow the economy's pace and lower inflation. Thus, regardless of the extent of your real estate holdings, it’s important to keep in mind that the housing market can have a significant impact on the broader economy and capital markets generally. “The formation of households is one of the main drivers of economic growth in the U.S.,” says Hainlin. “It has a large spillover effect on the economy, including materials that go into building or remodeling, and furnishings for homes.”
Be sure to consult with your wealth management professional to determine when and how real estate investments might be a good fit for you.
Housing prices fell over a seven-month period in 2022 and early 2023 and housing demand dropped when mortgage rates first began to rise. However, housing prices recovered to new record levels in late 2023. After declining in three consecutive months in late 2023 and early 2024, housing prices recovered beginning in February 2024 and reached new all-time highs in consecutive months from March through June 2024.5 As a result, homebuyers must deal with dual challenges of mortgage rates that are much higher than they were several years ago, and rising home prices.
The decision to purchase a home may depend on many factors, including your own personal priorities and financial situation. Some people may require a larger living space or have a desire to settle in a specific community. Those priorities may take precedence over the current mortgage rate environment. “Some people will also buy the home that appeals to them regardless of mortgage rate conditions,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. “Finding a different home down the line does not automatically substitute for the preferred house you find today.” While in an ideal world, mortgage rates would be more affordable, each potential homebuyer must determine the right time to purchase a house.
Interest rates began moving up in 2022, and mortgage rates followed suit. Today’s mortgage rates are more than double the rates that existed in 2021.1 That likely means that homebuyers are required to make higher monthly mortgage payments. This caused some potential homebuyers to step back from the housing market. At the same time, it led some current homeowners who potentially were interested in moving to a different house to hold off doing so, and preserve their current, low mortgage rate. Therefore, housing activity has slowed significantly, attributable primarily to the recent change in the interest rate environment.
As interest rates change, learn what the ripple effects across capital markets may mean for investors.
Investing in a real estate investment trust (REIT) is a way to diversify your portfolio. Here's a look at how to invest in REITs and diversify your portfolio into residential and commercial real estate.
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