February Market Report: The Rate Waiting Game

Nearly two full months into 2024, inflation still threatens pent-up demand. As inflation flirted with the Fed’s 2% goal, consumer sentiment also improved. Buyers are increasingly optimistic about the prospect of a soft landing that brings with it job security, lower inflation, and lower interest rates. Even Fed Chairman Jerome Powell expressed some cautious optimism.

“Growth is going on at a solid pace,' Powell told 60 Minutes in early February. “With the economy strong like that, we feel like we can approach the question of when to begin to reduce interest rates carefully.”

The only participant not cooperating is inflation. That was again made clear by the February CPI report, which came in higher than expected. In a single day, the 30-year fixed shot up 0.17 percentage points to 7.13% — amid CPI numbers that showed the soaring cost of shelter.

Is there a light at the end of this two-year tunnel of elevated rates?

Long-term consumer confidence is high

Better news came from Fannie Mae's Home Purchase Sentiment Index, which increased in January to its highest point since March 2022.

Given the rate climate, what’s most important is that respondents expressed more confidence in job security: 82% of respondents said they’re not concerned about losing their job in the next 12 months — up from 75% in December. Another bright spot: 60% of respondents said they think it’s a good time to sell.

Takeaway: “When we’re confident about job security, we’re more likely to make those necessary life-changing moves,” says Senior Zillow Economist Orphe Divounguy. “While economic growth is slowing, layoffs remain low, inflation is easing — albeit more slowly than previously anticipated — and that means higher real incomes to support housing demand. It also means less pressure on mortgage rates.”

How a rate dip shows up in the numbers

Key stat: The average 30-year rate moved down to 6.60% in mid-January.

Unfortunately, it’s only been up since then. Still, many markets got a welcome bump this year thanks to the rate drop in late ‘23 and early ‘24. Recently, new listings ticked up, especially in California (San Diego, Riverside, and Sacramento) and Florida (Miami and Tampa) metro areas.

Homes moved quickly in the Northeast for the first month of the year. Hartford, Boston, Columbus, and Washington, D.C. all saw the average home go pending in 10 days or less. Seattle, San Jose, and Richmond, VA, also experienced fewer days-to-pending than elsewhere in the country.

Mortgage applications, while still below last year, have increased in January — well before the start of the spring home shopping season.

The slightly lower rates lasted into January, but jolted upward in early February. While Zillow economists don’t predict a major drop in rates this year, it’s not out of the question that rates could ease as inflation cools.

“So long as inflation continues to moderate, and the labor market holds up, activity should increase compared to this time last year,” says Divounguy. “Supply was the constraint in 2023. That’s improving; new listings are 6% higher than a year ago.”

Takeaway: Be ready with rate news. Monitor economic reports and learn to anticipate potential rate volatility. Follow Divounguy on LinkedIn to stay on top of the latest. You can also set up Google Alerts for “FOMC meeting” and “Jerome Powell,” and “Orphe Divounguy.”

What to expect in coming months

Rates aside, many early indicators point to a competitive home shopping season. Attractive listings will move quickly. Demographic factors and a strong economy mean a large number of millennials and baby boomers are looking for houses, even while affordability issues remain. There’s good news on the supply side too: We already have more listings than we had a year ago.

Agents should verify that their buyers’ credit is in order, ensure they’re talking to a loan officer to understand their budget, and help them search by monthly payment to make sure they stay within budget, regardless of mortgage rate swings. As always, take care to bring up financing at the right time to understand their purchasing power. Higher real incomes could mean higher purchasing power this year.

For seller prospects, stress the importance of working with someone who knows the local market conditions and can price their home correctly. Sellers should make their home stand out by upping its online and offline curb appeal. Bidding wars are already happening for attractive properties priced right.