Effect of lower interest rates on market prices (trick question)

Orange County, California
Market Trends & Data
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Effect of lower interest rates on market prices (trick question)

German E.
Investor · Orange County, CA · Member since 2018 · 41 posts · 16 votes

Nobody knows how long mortgage interest rates will stay high, but one can start preparing by thinking what is likely to happen if/when they become lower, say in a year or two.  Most people seem to take it for granted that home prices will tend to go down, since demand will increase due to the cheaper mortgages.  But this is not obvious to me at all - notice that many people are stuck at their homes with a low mortgage rate that prevents them from moving.  When rates go lower, many will immediately offer up their homes for sale to move elsewhere, thus increasing supply as well as demand.  Thoughts?

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David Song
Real Estate Broker · Redwood City, CA · Member since 2014 · 679 posts · 888 votes
2y

The housing price will increase significantly in 2024 in the Bay Area.

The inventory level in San Mateo county and even east Bay Area has dropped to historical low, even though the price has not increased significantly.

This dramatic reduction in inventory is a strong precursor signal of rapid price increase.

For example, in foster city, the active SFH inventory today is down to 1 from 20-30 range.

In Hayward, the active SFH inventory dropped to below 30 from 50-100 range.

There is a huge number of buyers waiting to get into the market. With a simple projection of future rate stability or possible reduction, they have started to jump in. This has happened already, as indicated by the dramatic inventory reduction in December 2023.

The increased supply will be limited in my opinion, especially in CA due to property tax considerations.

My crystal ball says 2024 will be a high price appropriation year.

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  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    2y

    Rates have been artificially low for a long time (eg 10 years).  What we are seeing now are typical mortgage rates.  The low rates have allowed more people to buy, but also increased housing prices as a result.

    0Reply
  • Henry ClarkPro Member
    Developer · Member since 2020 · 4k+ posts · 4k+ votes
    2y

    Have to look past interest rates.

    1.  Housing shortage.  Builders can’t make headway versus demand for a few years.   

      
    2.  Segregate buyers, markets and property types.

    3.  Looks like you’re Orange County.  Sale your $1.5mm house with 3% rate.  Net $800k.  Move to Midwest for $600k and a bigger house and acreage.  With no interest.

    4.  You and spouse retired at 60. No loan.   Sale house with $400k gain.  No taxes since primary 2 out of 5 years.  Move to different area with no loan on new home.

    5.  Military, government, business transfer. You’re selling and moving.

    6.  Poor.  Live 6 versus 4 in a house.  If you buy or own the house just charge more.

    7.  People die or move to assisted living.  Houses come to market.

    8.  Interest drops from 8% down to 6%.  Forget what you believe in rate movement.  Sale price goes up and adjusts to market.   Since there is a low inventory.  

    We do Selfstorage, country subdivision lots, and flex buildings.  If interest rates go from 8% to 6% we start building again.  All of our material would go up again.

     Concrete is going up 10% across the board here.  It’s hard to get concrete. We needed 8 loads a day and they would only give us 3 loads at 3 pm.  No one wants to pour starting at 2 in the summer but you take it.  

    If you’re building if you don’t contract with a GC ahead of time you won’t get one if rates drop that much.  Thus your locked into current cost structure since GC won’t adjust.      

    Summary.  Don’t really see an “overall” loan P/I change if interest rates do go down.  Would take 2 to 3 years to draw down. 

    We have teed up 4 projects from land prep to drawings and permit.  Will probably sit on 2 of them waiting for lower “costs” not rates.   Can always refi rates but not paid cost.  

    2Reply
  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    2y

    @German E.

    I think the better question is what will happen in a year or two when inflation and interest rates are still high, and the real estate market / construction slows down from the largest amount of housing ever being built comes to a screeching hault and gdp slows considerably.

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  • Benjamin AakerPro Member
    Rental Property Investor · Brandon, SD · Member since 2015 · 1k+ posts · 1k+ votes
    2y
    Quote from @German E.:

    ... many people are stuck at their homes with a low mortgage rate that prevents them from moving.  When rates go lower, many will immediately offer up their homes for sale to move elsewhere, thus increasing supply as well as demand.  Thoughts?


     Many of these people bought too big because the rate was so low and they had a low monthly payment. These folks are now tied to their job. If rates suddenly went down, they wouldn't leave en masse because they still have a good job. The real problem will occur when the jobless numbers go up and people will be forced to sell. 

    1Reply
  • Carlos Ptriawan
    Member since 2019 · 7k+ posts · 4k+ votes
    2y
    Quote from @Benjamin Aaker:
    Quote from @German E.:

    ... many people are stuck at their homes with a low mortgage rate that prevents them from moving.  When rates go lower, many will immediately offer up their homes for sale to move elsewhere, thus increasing supply as well as demand.  Thoughts?


     Many of these people bought too big because the rate was so low and they had a low monthly payment. These folks are now tied to their job. If rates suddenly went down, they wouldn't leave en masse because they still have a good job. The real problem will occur when the jobless numbers go up and people will be forced to sell. 


     This thing that jobless number go up and people will be forced to sell is proven to be wrong too, otherwise home price in bay area would go down a lot by now.

    Reason: typical household has dual income , one layoff the other can cover; and then even if they have to sell, the rent would be there anyway. There is nothing that force people to sell. Job market is even still good even after layoff, but just to accept lower pay.

    0Reply
  • Carlos Ptriawan
    Member since 2019 · 7k+ posts · 4k+ votes
    2y
    Quote from @German E.:

    Nobody knows how long mortgage interest rates will stay high, but one can start preparing by thinking what is likely to happen if/when they become lower, say in a year or two.  Most people seem to take it for granted that home prices will tend to go down, since demand will increase due to the cheaper mortgages.  But this is not obvious to me at all - notice that many people are stuck at their homes with a low mortgage rate that prevents them from moving.  When rates go lower, many will immediately offer up their homes for sale to move elsewhere, thus increasing supply as well as demand.  Thoughts?


     The key to answer this question is to understand every micro market would act differently.
    Tampa,FL has different reaction with Austin which also react very differently than Bay Area.

    The key here is to understand the trend of the DOM.

    0Reply
  • Mark Mazzucco
    Lender · Mesa, AZ · Member since 2016 · 61 posts · 29 votes
    2y

    I just wrote about this in another post...but I've noticed when the rates went from just 8% back to the upper 6s the last 2 weeks I've had an increase in number of people trying to get pre-qualified....so I think when rates pull back to 4-5.5% hopefully, you would then see more buyers meaning prices would get stronger some. Just a thought.

    0Reply
  • German E.
    OP
    Investor · Orange County, CA · Member since 2018 · 41 posts · 16 votes
    2y

    Thank you for the answers, all good points - rates seem to be starting to go down and we will see how this plays out.  Sorry for my typo in the original question, when I said people take for granted that prices will go DOWN when rates decrease, I meant UP.  Tried to fix this but there doesn't seem to be an option for editing the text after the fact.  

    0Reply
  • V.G JasonPro Member
    Investor · Member since 2022 · 3k+ posts · 3k+ votes
    2y
    Quote from @German E.:

    Thank you for the answers, all good points - rates seem to be starting to go down and we will see how this plays out.  Sorry for my typo in the original question, when I said people take for granted that prices will go DOWN when rates decrease, I meant UP.  Tried to fix this but there doesn't seem to be an option for editing the text after the fact.  

     Your original thesis is going to ring true. When rates come down, supply will come up. This is going to cap this "blow out" appreciation people seem to have believed. It's just how detrimental will unemployment come. Perma-inflation is trending(3-5%) so basis on primo real estate is like 2.5-3x that annually, very good is 2x, average is 1x and subpar will be 1/4 of that if even negative. 

    It's much more of a rates thing than a supply thing then people have originally given credit for. People have been overlooking this, thinking just fundamental supply is putting a halt on any lack of appreciation. It's halted a crash. The issue is rates, as soon as those get tighter to the current inventory-- supply comes back on. This will also be a competitive detriment to new builds.  

    Curious how rental pricing goes with this. 

    1Reply
  • David Song
    Real Estate Broker · Redwood City, CA · Member since 2014 · 679 posts · 888 votes
    2y

    The housing price will increase significantly in 2024 in the Bay Area.

    The inventory level in San Mateo county and even east Bay Area has dropped to historical low, even though the price has not increased significantly.

    This dramatic reduction in inventory is a strong precursor signal of rapid price increase.

    For example, in foster city, the active SFH inventory today is down to 1 from 20-30 range.

    In Hayward, the active SFH inventory dropped to below 30 from 50-100 range.

    There is a huge number of buyers waiting to get into the market. With a simple projection of future rate stability or possible reduction, they have started to jump in. This has happened already, as indicated by the dramatic inventory reduction in December 2023.

    The increased supply will be limited in my opinion, especially in CA due to property tax considerations.

    My crystal ball says 2024 will be a high price appropriation year.

    3Reply
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