Mortgage rates drop and buyers shop, but what about listings and inventory?

[AJ Wong]

Well, mortgage have in fact fallen below 6% for well qualified primary home buyers. The effect on buyer activity (at least in our neck of the woods/waves) has been near instantaneous. Several investor clients that have been on the fence, are jumping off. 

There was some forum debate on the effect lower mortgage rates would have on buyers in marketplace, but there wasn't much discussion on inventory and sellers.

If rates drop enough, likely to low 5%'s (or dare I say) a high 4% handle, there could be a sizable increase in inventory as a result of seller's selling. 

Many property owners with historically low interest rates on their pandemic era mortgages, have been somewhat handcuffed to their property investments because of the dramatic difference in financing costs associated with moving or upgrading. 

I have friends whom during the past 4 years acquired several properties out of state with great rates but have had at least one discussion about listing their investment homes, and my presumption is that if not for their 4% rate, they might look to recuperate and reallocate some of their investment and profit. If they could theoretically; sell the investment (in an active and competitive market) and re-invest that capital at similarly low mortgage rates, that could lubricate the restrictive inventory and fuel a more robust housing market throughout 2024. 

I'm not completely convinced the war on inflation has been won. Too much debt, too much proportional expenditures on satisfying that debt and still an incredible amount of easy capital in the financial system. Furthermore, throughout the pandemic and rising rates, US inflation was contained by the strength of the US dollar. As the FED lowers rates, the dollar will continue to weaken, which could accelerate inflation (assuming energy and oil prices remain stable.)

What we observed this past week was the FED's surrender. Regardless of inflation indexes they cannot drastically raise rates further without risking financial destabilization. If you can believe it, an astounding 85% of Treasury debt issued in 2023 is due within twelve months or less. This debt needs to be refinanced, even more so than your personal or investment real estate mortgages. The FED's hands are tied. With all the volatility this year, it is easy to forget we're less than one year removed from the collapse of SVB and Credit Suisse, when the banking system was perceived as considerably more fragile. This is the best explanation of the complex US Treasury market I've ever read.

Even in a worse case scenario where inflation and banking volatility accelerate, the greater likelihood than a spike in mortgage rates would be some type of FED intervention and return to some form of quantitive easing through bond purchases or debt swaps. 

In extreme scenarios; inflation accelerates, commodity prices (like gold) spike and mortgage rates and equity markets decline, which could force investors toward hard, tangible real assets for rapid wealth and asset preservation. 

More likely, we'll see a trough in mortgage rates, inventory balance, dollar stabilize and and either a small correction in equities or a bull run fueled by lower than anticipated interests rates, sooner.