With Rates High, Why Haven't Prices Dropped?

The Weekly Recap

Hope everyone had a safe and happy Halloween! The Fed left rates unchanged, Wall Street made a ton of money in fees from NYC pensions, consumer spending continues to drive growth, Sam Bankman-Fried was found guilty on all seven fraud charges, WeWork filed for bankruptcy, a federal jury found that the National Association of Realtors (which NYC brokers are not a part of) liable for $1.8 billion in damages for conspiring to keep commissions high. Top MBA programs are enrolling more women than men and the world lost a Friend with the untimely passing of Matthew Perry.

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With Rates High, Why Haven't Prices Dropped?

It would be the logical belief that when rates rise, buyers are put off to the sidelines which would make sellers lower prices in order to attract buyers to buy in a high rate environment. Given the direct correlation between treasury yields and mortgage rates, it’s no surprise that mortgage rates followed the rising trend with the exception of a surprising gap between the two. This movement is limiting capital deployment and cooling activity in the residential space.

Mortgages rates are an obvious indicator which is why this newsletter follows them closely, as data shows a current slowdown in current and future sales as well as perspective buyer traffic. After exiting the summer months following unexpected strength in economic numbers in June/July, the appetite for home buying has taken a hit although looking bigger picture, are following longer term historical trends of seasonal purchasing.

With rates rising and lack of supply of buyers, why do prices continue to rise? In real estate, most indicators we look at are lagging, such as closing prices and inventory absorption. Although the number of real estate deals nationally are down about 20% there has been no decrease and in even some cases an INCREASE in pricing. One indicator that lead home prices is new home supply and home price data lags by almost a full year. Supply increased dramatically between late 2020 and into the middle of ‘22 but has fallen since then which has supported pricing. If rates continue to stay elevated, there will be a backlog of supply which will put pressure on pricing as time moves forward.

After the Fed’s meeting on Wednesday, Powell came out and said that they will hold rates steady for another month and were hawkish on the idea that we could see a rate hike in their December meeting. Powell also re-iterated that the target goal continues to be the 2% CPI number. There has been talk that the Fed may waiver on that target but with the conviction Powell shared this week, that’s highly unlikely and until we hit 2% we will probably not see the end of the rate hike cycle.

Getting into the housing market may become a waiting for some perspective homebuyers. Goldman Sachs believes in a research note released last week that rates will fall below 7% by the end of next year which might be quickly offset as home prices are up 26% since 2020 and according to Zillow are expected to be 5% higher next year.

The old adage remains true, ROI is not determined by timing the market, but by time spent IN the market.

Market Performance

Here are how some other indexes and asset classes have performed as of this mornings opening bell.

NYC Market Update

Here is a view of new inventory that has come onto the NYC market over the past week as well as newly signed contracts in Manhattan. For the third week in a row, more supply has come onto the market.

Mortgage Rate Update

The 30-year fixed-rate mortgage paused its multi-week climb but continues to hover under eight percent. The Federal Reserve again decided not to raise interest rates but have not ruled out a hike before year-end. Coupled with geopolitical uncertainty, this ambiguity around monetary policy will likely have an impact on the overall economic landscape and may continue to stall improvements in the housing market.

News You Can Use

• Strong Dollar Keeps Rate Hikes on Table for Asian Central Banks Bloomberg

• The Sales Pitch for an 8% Mortgage: Buy Now, Refinance Later- For Free Wall Street Journal

• Why the US Rate Surge Went Worldwide Axios

• Markets Are on Board with the Fed’s ‘Higher for Longer’ Policy CNBC

• Home Prices Hit Another Record High in August Yahoo Finance

• US Cuts Quarterly Borrowing Target to $776 Billion, Still Record Bloomberg

• From Amazon to McDonald’s, Strong Earnings Show US Consumer Resilience Reuters

• As the Market Enters Correction Territory, Don’t Blame the American Consumer CNBC

• Wall Street Raked in $1.7 Billion in Fees from NYC Pensions Last Year Bloomberg

• US Treasury Seen Boosting Auction Sizes As Budget Deficit Worsens Reuters

• Real Estate Industry Takes Fresh Hit With Verdict on Commissions Bloomberg

• The Money Has Stopped Flowing in Commercial Real Estate Wall Street Journal

The Deep Insight

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