The Fall Housing Market Could Be Red Hot—Here’s How Investors Can Profit

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According to Zillow, lower mortgage rates could lead to a busy homebuying season this fall. “Lower mortgage rates and rising inventory are giving homebuyers a window of opportunity at an unusual time of year,” the listings giant said.

Inventory Is Still Down From Pre-Pandemic Levels

Zillow reported that nationwide active inventory was up 22% year over year in August, although it remained 31% lower than the pre-pandemic level of August 2019. Meanwhile, new listings grew slightly monthly and yearly but were 21% lower than the same month in 2019. 

In a separate report, Zillow reported that unlike at the height of the rate hikes, when renting was cheaper than buying, the opposite is true in 22 of the 50 largest U.S. metros. New Orleans, Chicago, and Pittsburgh offer the most significant savings when comparing the cost of rent to a mortgage payment, assuming that the buyer purchases conventionally with a 20% down payment. 

Said Zillow Home Loans senior economist Orphe Divounguy:

This analysis shows homeownership may be more within reach than most renters think. Coming up with the down payment is still a huge barrier, but for those who can make it work, homeownership may come with lower monthly costs and the ability to build long-term wealth in the form of home equity—something you lose out on as a renter. With mortgage rates dropping, it’s a great time to see how your affordability has changed and if it makes more sense to buy than rent.

5.25% Is The Magic Number

The Wall Street Journal, quoting Moody’s Analytics, wrote that a 30-year fixed mortgage would need to fall to 5.25% before the monthly payment on a $419,000 home would close in on the average U.S. rent of $1,840.

According to a report on Realtor.com, much homebuying activity this fall could be seen in expensive California cities and/or on the East Coast, where the rate cut could have the biggest impact on monthly mortgage payments.

Many economists differ on just how busy the fall market could become. Though the half-point Fed rate cut is meaningful, as the market anticipated it beforehand and adjusted accordingly, many people feel it will be 2025, particularly in spring, when buying and selling kick into high gear. 

“We should be going back to pre-pandemic norms,” Selma Hepp, chief economist for CoreLogic, said in an interview with USA Today. “The pent-up demand is there, but the lower the rate, the better.”

One of the biggest contributing factors to the degree of activity depends on the available inventory and house prices. According to the latest S&P CoreLogic Case-Shiller Home Price Index, which ended in June, U.S. home prices posted a 5.4% annual gain, making buying still out of reach of many prospective homeowners and investors despite the recent rate drop. 

“The upward pressure on home prices is making this the most unaffordable housing market in history,” Lisa Sturtevant, chief economist at Bright MLS, said in her analysis.

“For the best possible outcome, we’d first need to see inventories of homes for sale turn considerably higher,” Keith Gumbinger, vice president at online mortgage company HSH.com, said in the USA Today article. “This additional inventory, in turn, would ease the upward pressure on home prices, leveling them off or perhaps helping them to settle back somewhat from peak or near-peak levels.”

Cutting Rates Too Quickly Could Have an Adverse Effect

Though many investors are hoping for further rate cuts, too many too soon could cause a frenzy in the housing market that would be detrimental to both buyers and investors, resulting in higher prices that could eradicate any increases in inventory. It’s a double-edged sword because lower interest rates will allow rate-locked homeowners to sell and thus create more inventory. However, if the rates drop too precipitously, prices will rise. 

According to a recent Freddie Mac report, the inventory shortage remains well below the pre-pandemic average for now. 

“I don’t expect to see a meaningful increase in the supply of existing homes for sale until mortgage rates are back down in the low-5% range, so probably not in 2024,” Rick Sharga, founder and CEO of CJ Patrick Company, a market intelligence and business advisory firm, told Forbes.

Commercial Real Estate Investors Could See Fast Relief

The Fed rate cut directly impacts commercial real estate investors with adjustable-rate mortgages, as they are indexed to short-term rates, such as SOFR or prime. Lower rates also increase liquidity across the financial system.

“With rates rising faster and higher than in recent memory, cash flow coverages on many deals have gotten skinnier,” Al Brooks, head of commercial real estate for JPMorgan Chase, said on the company’s website. “As a result, commercial real estate lenders have had to take out additional reserves against their portfolios.”

“As interest rates decrease, cash flow coverage increases, bringing down loan loss reserves for banks,” Brooks continued. “Lower reserves can then be put back into the market and facilitate more deal flow.” 

Thus, it will be easier for prospective commercial real estate borrowers to get loans from banks. Even if the rates aren’t exactly where investors want them, looking for opportunities and starting conversations with lenders early, in anticipation of further rate cuts, is probably a good idea, considering how long commercial real estate deals can take to close, factoring in inspections, lease audits, and financing. Brooks advises that lower rates could be a good time for commercial investors with loans near the end of their term to refinance to lower payments, save money on interest, and free up cash for renovations or to purchase more real estate. 

Final Thoughts 

If there was ever a time to buy and hold real estate, it is now. With the Fed signaling that 18 months of rate cuts are ahead and prices likely to rise with increased affordability, simply buying now and selling once this happens is expected to be profitable, even with a minimum amount of work. Of course, it means buying right—regardless of asset class—and not paying too much. 

Regardless of your investment preference—commercial, residential, flipping, or buying and holding—buying this fall should prove a prescient move before the next round of rate cuts.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.