2024 Quarter 3 real estate market update

A few weeks late on this Q3 Market Update. This was partly due to significant volatility in our marketplace and I felt it would be more valuable to wait until things settled a bit before sharing the latest insights. To give you a clear overview, I've highlighted a few key headlines from the media, which will be the focus of this newsletter.

• Interest rates | “The Federal Reserve cuts Interest rates for the first time in four years”
• Supply Levels | “Mortgage Lock-In Effect Shows Signs of Easing as New Listings Increase”
• Upcoming Presidential Election | “Sales of Existing Homes Drop to 14-Year Low as Election Uncertainty Looms?”
• Post NAR Settlement | “Buyers are paying their own agents?”

Interest Rates

We’ve been eagerly anticipating this transition to a cutting cycle for what feels like a century. You might recall that back in late 2023, we received an optimistic response from Powell as the FOMC signaled progress toward their 2% inflation target. This was seen by many as a signal that rate hikes were over, and the markets interpreted it as a shift toward future rate cuts. As we entered 2024, the market had priced in over a 50% chance of a first rate cut in March, with high confidence that a 25 bps cut would happen by June. But after a few unexpectedly high inflation reports early in the year, Powell & Co. opted to hold off. At one point, there was even talk among FOMC members about revisiting rate hikes. It wasn’t until recent job reports showed some weakness in the labor market that the FOMC began to seriously consider starting the cuts.

On September 17th, 2024, the Federal Reserve made its first rate cut in four years, surprising many with a 50 bps cut instead of the expected 25 bps. For those closely watching prediction markets, this shift might have been less of a shock, as the tone had shifted before the meeting, reflecting concerns over weakening labor statistics. However, the broader consensus anticipated a 25 bps cut, so the 50 bps move raised questions about the true strength of the economy. Now, all eyes are on the upcoming job reports and any revisions that might signal a slowing economy as we continue to navigate a “Soft Landing.”.

So, after all the discussion around the Federal Reserve and interest rates, where have mortgage rates gone since September 17th? They’ve actually gone up!

On the day the rate cut was announced, the average 30-Year Fixed rate was 6.11%, while the 30-Year Fixed FHA rate sat at 5.69%, the lowest in nearly two years. But since then, mortgage rates have edged up considerably, and as of this newsletter, the average 30-Year Fixed rate is 6.92%, while the 30-Year Fixed FHA rate sat at 6.38%. This increase represents a two month high.

The reason for this lies in the strong correlation between mortgage rates and the 10-year Treasury yield. While the Federal Reserve's policies play a role, especially over time, the immediate impact of a 50 bps rate cut is more pronounced on short-term rates rather than on mortgage rates.

Looking at the recent rise in the 10-year Treasury yield (and the resulting uptick in mortgage rates), it's important to understand how bonds function—and let’s remember, I sell houses, not economic forecasts!

The 10-year yield often moves in response to broader market forces like inflation expectations, economic outlook, and global supply and demand, which don’t always align directly with the Fed's decisions. Current macroeconomic factors, such as the situation in the Middle East and rising oil prices (which can drive inflation), along with the growing U.S. deficit, have directly influenced U.S. bond yields. In summary, while we believe that mortgage rates will trend downward as the Fed continues its cutting cycle, it’s crucial to recognize that each rate cut may not immediately bring the relief that buyers are hoping for in their borrowing costs.

Pro tip: When purchasing a home in coming weeks or months consider a 7/1 ARM or other variations of an adjustable rate mortgage. While doing so, consider increasing the mortgage rate in exchange for a lender credit. The impact of the higher mortgage rate on monthly payments is often minimal compared to the savings from avoiding significant upfront closing costs. By doing this you set yourself up for an easy decision to refinance in the short term (6-12 months).

Supply Levels

The summer months unfolded just as we anticipated in our Q2 Market Update. Following a robust spring rally in both new inventory and median sales prices, we observed buyers starting to push back against the record-high median sale prices in Santa Clara County. This resistance came as they continued to find no relief from high borrowing costs.

*MLS data provided | Single Family Homes | Santa Clara County

August marked the first year-over-year (YoY) decrease in median sales price since May 2023, when prices had dipped more than 9% from their 2022 peak. Since then, the market has seen a modest recovery, now sitting about 7% below the historic highs recorded in May of this year. We expect home values to remain relatively stable through the end of the year. 

*MLS data provided | Single Family Homes | Santa Clara County

Outside of interest rates taking some time to compress, another reason we don't foresee short-term price gains is the ongoing rise in supply. The average YoY increase in inventory for 2024 has been roughly 29%, with the majority of this growth occurring in the spring before tapering off. However, it’s worth noting that Days on Market (DOM)—a key metric for understanding demand and market pace—has increased in recent months. In April, homes averaged 13 days on the market, whereas by September, that number had risen to 21 days. This slowing pace indicates that buyers, with more options available, are taking their time and being more selective in their home searches, leading to properties staying on the market longer.

Earlier this year, with significantly lower inventory, buyers acted swiftly as prices rose more than 12% in the first half of the year, ultimately surpassing previous highs for median sales price in Santa Clara County.

The caveat is that despite the progress in supply this year, inventory remains well below pre-pandemic levels, and it's uncertain whether decreasing interest rates will encourage enough sellers to enter the market. We've been facing a significant “lock-in” effect, with many existing mortgages still below 4%. This puts potential home sellers in a challenging position, as they must decide whether to trade their current low-rate mortgage for a new one with a significantly higher rate. As rates trend toward 5% in 2025, we’ll be keeping an eye on whether this shift leads to an increase in supply that can meet the likely surge in demand, as borrowing costs become more manageable. If supply levels remain constant, we expect the spring market to be very competitive.

Upcoming Presidential Election

In case you managed to stay away from every possible news publication, we are less than two weeks away from election day and without getting too political it seems that both sides view this election to be an existential risk to the American way of life. However again, I sell houses not political opinions, and I want to touch on the historical trends and perceptions associated with election years. As I mentioned above, mortgage rates have not come down enough to increase demand and despite the progress in inventory levels, we are seeing homes stay on the market longer. But how many people are simply just waiting to see what happens with the election, before making a significant life decision like buying or selling a home?

According to Keith Griffin reporting for Realtor.com, alot. On a national level, home sales (excluding new construction) dropped to a 14-year low last month. 

However, historical data suggests that this correlation might be less pronounced than we think. According to a study by JBREC, there's little historical evidence to support the claim that presidential elections directly impact home sales. The study found that the decline in home sales during election years is largely in line with seasonal trends. So while seasonality certainly affects the housing market come November, the decline in sales volume in months leading up to an election can largely be tied to these regular seasonal trends. 

So, why does everyone refer to election years as down years? It's possible that the perception of a strong correlation stems from media coverage or coincidental historical events. There have been many instances where political events have coincided with significant changes in the housing market, but these are often due to other underlying factors like recessions. 

In summary, while many people express uneasiness about the results of the upcoming election, it’s possible that the 14 year low in sales volume is merely a result of near record low supply and buyer fatigue. 

Post NAR Settlement

Recently, the National Association of Realtors (NAR) reached a major settlement regarding commissions and transparency in real estate transactions. The settlement is expected to bring greater clarity around how commissions are handled in real estate transactions, specifically when it comes to who is responsible for paying the buyer's agent. This change will likely lead to more transparent discussions about commission structures during negotiations, empowering buyers with more control over how agent compensation is managed.

One major shift you might hear more about is the evolving conversation around Buyer Broker Agreements (BRBC). Traditionally, these agreements—contracts that outline the responsibilities and compensation for a buyer’s agent—have been optional in most cases. However, California is currently working on passing legislation that would make these agreements mandatory before submitting an offer. In fact, as of August 17th our local MLS has already required that we have these agreements in place with our clients before even showing property.

The proposed CA law aims to ensure transparency between homebuyers and their agents, making it clear upfront how the agent will be compensated and the services they will provide. In my opinion this is the biggest win. This change could help avoid misunderstandings and establish clearer working relationships between buyers and agents.

What Does This Mean for You?

If you are looking to buy, be prepared to ask the tough questions up front before entering into a written agreement. How are you (agent) going to actively work towards helping me with my real estate goals? Look to understand their processes and how they plan to give you an edge in this competitive market. 

For those planning to sell in the near future, it's more important than ever to stay informed about how these changes are affecting your real estate transaction. While the NAR settlement did aim to decouple agent commissions we are still seeing most buyers elect to transfer the responsibility of their BRBC to the sellers as part of their offer. Essentially it has become a negotiation point. The primary reason for this is purchasing power. Buyers are asking sellers to assume the buyer agent compensation as a means to stay competitive with purchase price. As a result the buyer broker compensation gets looped into the financing rather than out of pocket capital.

As of now we are currently advising sellers to only discuss listing broker compensation with their agent. Given the current market conditions, we do not believe it is advantageous to market buyer agent compensation. With a well executed pricing strategy and marketing plan you should be receiving multiple offers. As a result, this competition may drive down buyers agents fees and therefore reduce the amount of closing costs paid for by you. Ask your agent to provide you with a net sheet for each offer submitted. This will provide a clear picture of your net proceeds.

As always, we’re here to help guide you through these shifts and ensure you're well-prepared for any impact these updates may have. If you have any questions about the NAR settlement, the buyer broker agreement, or anything else mentioned in this newsletter, feel free to reach out.