While many real estate agents are dream sellers, Gina Lalli, senior loan officer at Shamrock Home Loans in Newport, often has to give buyers a dose of reality.
She’s witnessed the roller-coaster housing market over the past four years, and the delight and disappointment in its wake.
And in some cases, Lalli worked with clients who had found a suitable home and had all of the qualifications, only to have a wealthy all-cash buyer swoop in and snatch it away.
“There is always the sticker shock from prices. Now that is coupled with the sticker shock of rates,” she said. “A two-point spike in mortgage rate could price someone out. Those are the conversations that I’m always having,”
In November, home sales fell for the 19th consecutive month, according to the Rhode Island Association of Realtors. Mortgage applications were 20% lower than in November 2022. Over the previous year, existing home sales activity has declined by 14.6%
Many would-be buyers, even if they have a healthy downpayment and impeccable credit, have cold feet about jumping into the market, fearing the cost of bad timing. And the existence of buyers alone, which can spur private development in regions with excess developable land, doesn’t help much in Rhode Island, which was last in the nation for single-family building permits issued per capita in 2021, according to the U.S. Census Bureau.
After 11 rate hikes since March 2022, inflation has finally begun to shrink from four-decade highs. The Federal Reserve has declined to raise rates at each of its last three meetings and has signaled three rate cuts in 2024.
Peter Nigro, the Sarkisian chair in financial services at Bryant University in Smithfield, said the house sales stagnation is due to more people sticking with what they’ve got, particularly those who refinanced during the COVID-19 pandemic only to see rates double afterward. The average rate for a 30-year fixed mortgage in the U.S. was 7.22% in November, according to mortgage buyer Freddie Mac. That’s after average rates fell to levels in 2021 not seen in a generation, moving as low as 2.65%. “We are not going to see [that] again anytime soon, if ever,” Nigro said.
“A lot of people are locked in their houses because they have a low-rate loan,” he said. “And they are afraid if they move, their payment is going to go up dramatically. This makes it harder for young people to start out. There is just not enough inventory. Things just don’t stay on the market very long.”
Nigro, who served as a senior financial economist in the Policy Analysis Division at the Office of the Comptroller of the Currency, a bureau of the U.S. Treasury Department, says there is still no consensus among Federal Reserve board members on what the pace of cuts should be.
But if rate cuts come in 2024, “it may spur the market a bit,” he said. “But it’s still going to be a seller’s market. There are always persistent fears [among Federal Reserve members] about inflation.”
But Nina Eichacker, assistant professor of economics at the University of Rhode Island, says that even three rate cuts of 25 basis points each could have a significant impact.
Eichacker says the housing market presents a policy paradox. The Federal Reserve tried to curb inflation but ended up cutting down the housing supply because people were less willing to sell if the cost of financing another purchase was going to be higher.
It’s not a supply and demand issue, she says. There is always demand because everyone needs a home.
“A lot of what is driving inflation in the U.S. is high housing prices,” she said. “But raising interest rates has a way of discouraging the purchase and construction of housing, which would bring down prices. And meanwhile, people who have to borrow are paying interest rates twice as high as they were two years ago.”
In the end, lower interest rates in 2024 would be a net positive for housing. People need only to look at the historic averages and leave the outliers of 2020 and 2021 aside.
“It’s a reversion to mean, which is not the end of the world,” Eichacker said.
For Lalli, any momentum is welcomed.
Mortgage applications increased 7.4% over the week ending Dec. 8, according to data from the Mortgage Bankers Association.
Observers believe a rate cut of 25 basis points will happen in May 2024, amid the typical high-activity season for real estate. And while new home construction remains slow, an increase in “home trading,” the lifeblood of the housing market, could be enough to spur inventory back to where it should be.
Lalli remains optimistic.
“It doesn’t take much to move the needle,” she said. “If rates are cut, the supply and demand will come back into play, which is what we are all hoping for.”
Lalli says that younger buyers in recent years have become more educated on the financing process. Many of them came of age during the financial crisis and the explosion of the internet and social media.
This year may be a return to normal, Lalli says, so long as the pendulum doesn’t swing too sharply in the other direction when money becomes cheaper.
“[Prospective homebuyers] already know going into these conversations they have to have savings and a good credit score,” Lalli said. “But it’s important to work with someone who is not only going to tell you the maximum you can afford.”
