Lower mortgage rates good news for housing

It's about time the Fed decided to lower interest rates. Hopefully, it's not too late. Anticipating the Federal Reserve would lower interest rates, mortgage lenders have been ratcheting down interest rates for the past three weeks. According to mortgage giant Freddie Mac, last week's average rate for a 30-year fixed-rate mortgage was 6.35%. Last year the 30-year fixed was 7.25% and reached a high of 8% last October. Assuming the Fed continues to lower rates at its October and November meetings, mortgage rates could be under 6% by the end of the year.

The Fed has won its war on inflation but now faces the possibility of a recession. The Fed's policy of higher interest rates has slammed the real estate market and slowed economic growth. Higher interest rates influence everything from business expansion, employment and consumer spending. Historically, recessions often follow prolonged periods of inflation or high interest rates. We have had both.

The Fed is looking at the jobs report, which was less than anticipated. Unemployment has increased for the fourth straight month. That news triggered a slide in equities and renewed anxiety about a possible recession. J.P. Morgan Research has raised the probability of a U.S. and global recession starting before the end of 2024 to 35%, up from 25% in its mid-year outlook.

The Fed's higher interest rate policy has affected more than mortgage rates. Many Americans carrying credit card balances are struggling. The average credit card balance for those with a balance is about $7,000. The average interest rate is 21% — up from 15% in 2019. That explains why 9% of credit card balances are delinquent.

Higher interest rates are attributed to an increasing number of delinquent auto loans. The average interest rate on a 60-month auto loan is 8.2% — up from 5.3% in 2019. The current delinquency rate on auto loans is 8%, the highest in over a decade.

Higher interest rates have been pushing up rents. Commercial and multi-family residential loans are typically adjustable-rate loans. The low interest rates that have financed a million new apartments and refinanced another 2 million have long expired. Apartment owners are paying double the interest on their loans today and passing that increased interest expense along to their tenants.

Lower mortgage rates are about to change the market. If planning on buying a home this year, it's best to start early. Typically, when mortgage rates go down, more buyers jump into the market. Good homes sell quickly and prices begin to rise. The savings from landing a lower mortgage rate is often lost by price increases.

Sellers today are anxious to make a deal. Prices have been stagnant; sales are anemic and most sellers are accepting offers under their listed price. El Dorado County's median selling price in August was $620,000 or $320 a square foot. A year ago, the median price was $600,000. The 3% increase was the smallest year-over-year price increase since 2007. County home sales in August were 10% less than last year while the number of homes on the market increased 23%.

The residential market lives and dies on mortgage rates. When in late-May mortgage rates went over 7%, buyers took an extended home shopping vacation. Lower mortgage rates will change the market dynamics. Buyers who arrive early will have a greater selection of homes and find sellers receptive to their offers. That won't last long. Sellers will respond to increased buyer activity with higher prices and holding firm on their listed price.

The uptick in inventory should continue. An increasing number of sellers have decided that life is more than a low mortgage rate. Most new listings with a mortgage have an interest rate below 4%. Homeowners who were staying put with their low-interest mortgages have decided they have other more important priorities.

Homes in El Dorado County are still underpriced. With the state's median selling price over $900,000, county homes are a bargain. Living close to urban work centers and the beach isn't worth the price. Quality of life matters. Bay Area sellers will continue to be El Dorado County buyers. Most will discover a new address in El Dorado Hills.

This will be my last weekly column. A self-reflective line by Clint Eastwood in his 1973 Dirty Harry movie is, "A man's got to know his limitations." After 50-years involved in all aspects of real estate and 20 years of writing for the Mountain Democrat, it's time for someone else to step forward with information and commentary on the local real estate market.

I am grateful to my editors and publisher of this newspaper who have allowed me the opportunity to share my experiences and opinions. I'm thankful to my loyal readers. They have been my inspiration for all the early mornings and late nights composing a column I prayed someone would read. I'm blessed to have a wife who has patiently allowed me the quiet time required and has been my proof editor. I have received more from the experience of writing this column than I have given. We are fortunate to live and work in El Dorado County where I plan to remain an active participant.

Ken Calhoon is a real estate broker in El Dorado County. He can be reached for questions or comments at ken@kencalhoon.com.