The average and median sale price of homes in the Portland Metro fell by less than 1% in August. The inventory of homes rose to 3 months so we are now officially in a balanced market. It’s been a great market for buyers lately. Most houses are taking longer to sell and mortgage rates have fallen substantially. There is a clear disconnect there since improved affordability normally brings buyers into the market in droves. We have helped several buyers find properties lately while things are still working in their favor. While an agreement between a buyer and their agent is required to tour listings in Oregon and pretty much all of the United States now, the 6 deals we have negotiated since the changes in mid-August all had the seller paying the buyer’s agent compensation. Most also had large closing cost credits being given to the buyer by the seller. The lack of understanding from some consumers around the new rules could be contributing to fewer buyers actively looking at homes in a time window when they clearly should be. Incoming economic data continues to support the Federal Reserve starting a rate cutting cycle later this week. As this plays out further, mortgage rates will continue to decline. Eventually when the 30 year fixed rate reaches a low enough level, increased home affordability has the potential to bring several million buyers into the US housing market. This would cause negotiating leverage to shift dramatically in favor of sellers. However, we are not there yet. Buyers have a lot of negotiating power for the time being.
The 30 year fixed rate averaged 6.2% across the United States last week. However, I know of several lenders offering 30 year fixed rate mortgages under 6% right now. Mortgage rates could fall substantially in the next few months depending on the actions of the Federal Reserve. The Fed has a dual mandate of promoting maximum employment and keeping prices stable. We have seen weak data in both areas lately. The rate of inflation continues to decelerate with the Consumer Price Index (CPI) coming in at only 2.5% in August. This was down 0.4% from July as the rate of inflation hit a 3 year low. However, core CPI, which excludes price changes in food and energy, still showed a 3.2% increase in prices over the last 12 months. The US economy added 142,000 jobs in August as the unemployment rate fell from 4.3% to 4.2%. While the unemployment rate falling last month is positive, US job openings just hit their lowest level since January 2021. Prior to August, the unemployment rate had risen for 4 consecutive months, so the results in August don’t necessarily negate the trend of rising unemployment and deteriorating labor market conditions. On September 3rd, it was reported that the rate of US manufacturing activity continued to contract for a 5th consecutive month. We are seeing weak economic data in some of the less closely followed statistics as well.
As a whole, economic data looks negative. Despite the momentary pause in the rise of unemployment, there are plenty of reasons for the Fed to start a rate cutting cycle at the end of their meeting on September 18th. The big question is how much they will cut the benchmark lending rate by. The bond market thinks 0.25% is much more likely than 0.5%. I don’t think the magnitude of this initial rate cut matters as much as how quickly future rate cuts materialize. Rate cuts usually take 6-18 months to help the overall economy. However, the main part of the economy the rate cuts could immediately impact happens to be the real estate market. If we get guidance that the Federal Reserve will cut the benchmark lending rate by several percentage points over the next 12 months, this could cause another big fall in mortgage rates. That being said, the market already has big expectations. If Federal Reserve Chairman Jerome Powell’s comments on September 18th don’t corroborate the rate cuts already priced into the bond market, we could see mortgage rates rise temporarily later this week. It’s a very real possibility the Fed could disappoint here.
The continued deterioration of the labor market is going to help housing as this plays out through the fall and winter. Even if the Federal Reserve fails to alleviate concerns about their overall complacency in the immediate term as the US economy heads towards a recession, their hands are going to be tied shortly. There hasn’t been an instance in the last 50 years when the unemployment rate increased 0.5% within a 3 month period and just stopped rising. Unemployment will be the main driver but an unexpected 0.4% deceleration in the rate of inflation certainly doesn’t hurt either. The truth is that in any downturn there are winners and losers. Some industries experience layoffs and bankruptcies, some industries just survive, while certain industries can actually thrive in recessions. In real estate, anything that drives mortgage rates lower and increases home affordability will drive housing market activity and be a tailwind for home prices. I definitely expect to see a 10-14% increase in Portland home prices in the first half of 2025 for a 5th consecutive year. The real question is, will home prices jump in the fall in response to lower mortgage rates before we even get into 2025? If that happens, anyone thinking they can wait until 2025 to buy is in for a surprise. I can see scenarios in bidding wars where buyers will need to pay for their own representation to even have a shot at certain homes next year. That’s not taking into account the financial strength of individual buyers being judged carefully in those types of situations. Any prospective buyers not sitting on six figures in savings need to look at moving up their plans so they don’t suddenly get caught in a deep seller’s market. Any trepidation buyers have about the economy is misplaced if it’s currently helping them. The point is to buy when fewer people as a whole are buying. If you buy when everyone else is buying, that’s a bidding war.
