Fed dropping rates 3 times in 2024, time to buy or sell?

[eddy20]

Looking for discussion with the Fed singling 3 rate drops in 2024; where will the market head?
1) good time to buy now before prices increase and Re-Fi later?
2) will this make more buyers in the market which in turn should increase prices?
3) opinions on price increases?
4) RE people have stated if rates go down RE prices should increase 10-20% next year, do you think we will see those type of increases?

[SilentC]

Hey eddy, it’s such a cliche but it seems local.  I looked at a few publicly traded apartment REITs this month and was getting to 8%-8.5% cost of equity (expected long run return) on conservative #s using 4% risk free rates.  Locally it’s worse returns for SFHs.  I’m not smart enough to know if rates go higher or lower from here but as of now if the Fed cuts 3x next year that is in line with expectations so mortgage rates shouldn’t move a ton.  And actually investors per Bloomberg are pricing in a pretty high probability of 4 cuts.  My gut tells me it will just be volatile. 

8%+ on a REIT isn’t bad especially given the stability and low risk of obsolescence but trying to compound at 10%+

[clarkfan1979]

I agree with the comments about RE being local. Here are some thoughts. If the FED lowers rates, it would most likely be in response to a recession and/or higher unemployment. The FED isn't going to lower rates "just because they feel like it"

When the recession and/or higher unemployment hits, how is the local economy going to be impacted by it? Some areas will be more or less impacted. If you hold everything else constant (which you can't really do), I could see 10% home price appreciation, if mortgage rates went from 7.5% to 6%. 

[406MtnFire]

Hard to say, location matters as does price point. I think first time home buyer houses (in your market) will drop the least/ may rise the most. I think mid-upper tier will drop more or rise less.  My complete guess for small to medium towns in Montana - houses $600k+ will drop 10+% and houses $300k-600k will be -10% to +10%, depending on location and condition. Good house in good location will maintain competitive. Poor condition house in poor location, will sit on the market.

[eddy20]

Asking for an updated CMA on my rental in SoCal, the agent wanting my house to list for sale said the following "That being said, we predict a big jump in values starting late Jan. - early Feb next year. Interest rates have come down already by about 1% over the last 3 weeks. Plus the Fed has come out and said they are planning 6 different rate reductions in 2024. This will improve buyer affordability and we expect solid appreciation by mid Q1 next year."

[BrianT]

Asking for an updated CMA on my rental in SoCal, the agent wanting my house to list for sale said the following "That being said, we predict a big jump in values starting late Jan. - early Feb next year. Interest rates have come down already by about 1% over the last 3 weeks. Plus the Fed has come out and said they are planning 6 different rate reductions in 2024. This will improve buyer affordability and we expect solid appreciation by mid Q1 next year."

I'm always a bit skeptical of advice from an agent, whether on the buyer or seller side. A seller's agent will say what's needed to get the sale going. However, it's not to say the reasoning isn't logical.

I'm working on getting some numbers with market rent in the case a new tenant comes in. Luckily right now two units in the same community as my rental are up for sale, I'm watching it to see what it ends up selling for.

[clarkfan1979]

Asking for an updated CMA on my rental in SoCal, the agent wanting my house to list for sale said the following "That being said, we predict a big jump in values starting late Jan. - early Feb next year. Interest rates have come down already by about 1% over the last 3 weeks. Plus the Fed has come out and said they are planning 6 different rate reductions in 2024. This will improve buyer affordability and we expect solid appreciation by mid Q1 next year."

I'm always a bit skeptical of advice from an agent, whether on the buyer or seller side. A seller's agent will say what's needed to get the sale going. However, it's not to say the reasoning isn't logical.

I'm working on getting some numbers with market rent in the case a new tenant comes in. Luckily right now two units in the same community as my rental are up for sale, I'm watching it to see what it ends up selling for.

I have similar concerns about the "typical" real estate agent that is mostly looking at the short term gains of a sale. The really good agents will give you good honest feedback even if they do not benefit in the short-term. They have faith that they will benefit in the long term and in my opinion, they are correct.

I got a real estate agent recommendation from good friends when purchasing a house. The real estate agent is a business partner with my good friends. They own some rentals together.

I bought a house using this agent and it was a great experience. We got the house under contract with 9 competing offers in 2018 and the contract price (603K) was still under the appraised value (615K). We put 50K into the house for repairs. It was a foreclosure.

Fourteen months later I accepted a job out of state to be closer to family. I asked her for a CMA and her thoughts on if I should sell or rent. She came back and said you could list the house for 799K and it would be under contract within 7 days for full asking or slightly higher. She then said, "If it was me, I wouldn't sell. I would rent it and I would rent it furnished." The market wants furnished rentals and we can charge a premium rate. We also have to do minimal work when we leave. This is something that I never previously considered. She was correct.

If would have been easy for her to suggest to sell and take the short-term gain of a quick commission check. However, she didn't. This is why she continues to get many referrals from me and other people. I'm guessing her net worth is at least 20+ million based on all the properties that she owns that I know about. She doesn't need the quick commission check. She is very good at playing the long game.   

[ChpBstrd]

The positive impact of lower rates (which I agree are coming) could be offset by the "overpriced" level of the market. That is to say - the expectation of lower rates seem to be priced in already. Anyone buying at today's prices and interest rates is making a bold bet that rates go lower from here.

The "overpriced" part is not just my opinion. Ratings agency Fitch just issued a report that said:

As of 2Q2023, home prices in 88% of the country's MSAs were overvalued, with 55% of these areas by 10% or more.

Fitch projects that nominal national home prices will increase 0% to 3% in 2024. This trend is expected to persist in 2025 with home prices rising at a rate of 2%-4%. Fitch expects the Federal Reserve to take the funds rate to 4.75% by the end of 2024, 75 basis points below year-end 2023 levels.

Housing inventory is still constrained, with 3.6 months of supply as of October 2023.

The Fitch assessment is supported by price/rent, price/income, and payment affordability ratios. It's interesting the ratings agencies are paying attention to this - but not mentioning any impact on ratings for MBS or banks.

I think everybody rushed into housing after 2020 because buying a leveraged inflation hedge was looking like the smart move. However, today's -0.1% PCE report suggests we could be suffering from deflation within months, especially considering high real rates, the slow timeframe of any potential rate cuts from the Fed, and the trajectory of inflation since June 2022. Deflation would flip the script on housing leverage - the value of the debt would increase while the value of the house fell.

[Midwest_Handlebar]

The positive impact of lower rates (which I agree are coming) could be offset by the "overpriced" level of the market. That is to say - the expectation of lower rates seem to be priced in already. Anyone buying at today's prices and interest rates is making a bold bet that rates go lower from here.

The "overpriced" part is not just my opinion. Ratings agency Fitch just issued a report that said:

As of 2Q2023, home prices in 88% of the country's MSAs were overvalued, with 55% of these areas by 10% or more.

Fitch projects that nominal national home prices will increase 0% to 3% in 2024. This trend is expected to persist in 2025 with home prices rising at a rate of 2%-4%. Fitch expects the Federal Reserve to take the funds rate to 4.75% by the end of 2024, 75 basis points below year-end 2023 levels.

Housing inventory is still constrained, with 3.6 months of supply as of October 2023.

The Fitch assessment is supported by price/rent, price/income, and payment affordability ratios. It's interesting the ratings agencies are paying attention to this - but not mentioning any impact on ratings for MBS or banks.

I think everybody rushed into housing after 2020 because buying a leveraged inflation hedge was looking like the smart move. However, today's -0.1% PCE report suggests we could be suffering from deflation within months, especially considering high real rates, the slow timeframe of any potential rate cuts from the Fed, and the trajectory of inflation since June 2022. Deflation would flip the script on housing leverage - the value of the debt would increase while the value of the house fell.

You state that anyone buying today is taking a "bold bet" that interest rates are going lower, but bring up the possibility that we might be going into a deflationary period. The last thing the fed wants is deflation and will combat this by aggressively lowering interest rates. Jerome knows this and that's why he was so dovish during the last fed meeting. All the inflation indicators over the past 2 weeks or so indicate that the Feds job is done fighting inflation and deflation is becoming more of a concern.

Housing prices being "overpriced" are a direct result of elevated interest rates. As interest rates come down in '24-'25 affordability will normalize some. Housing still has strong tailwinds IMO because the nation has underbuilt for 10+ years. We're 4 million units short of what we need and until we build more, housing will remain expensive.

[aasdfadsf]

I agree with the comments about RE being local. Here are some thoughts. If the FED lowers rates, it would most likely be in response to a recession and/or higher unemployment. The FED isn't going to lower rates "just because they feel like it"

I agree with this. Despite what people "feel", we are in something of a Goldilocks economy. Unemployment is at a historic low, inflation is tamed, and yet consumer spending is still very high in part because real incomes are rising. There is no reason for the Fed to fuck with it.

It's hard for a lot of people to get that the current interest rate environment is normal historically speaking. The near-zero rates after the Great Recession and the subsequent pandemic situation were very much abnormal (and that was a 15-year period!). But the Fed should only cut rates if there is a recession, which will happen one day, but that is not clearly happening on the immediate horizon.

[Midwest_Handlebar]

I agree with the comments about RE being local. Here are some thoughts. If the FED lowers rates, it would most likely be in response to a recession and/or higher unemployment. The FED isn't going to lower rates "just because they feel like it"

I agree with this. Despite what people "feel", we are in something of a Goldilocks economy. Unemployment is at a historic low, inflation is tamed, and yet consumer spending is still very high in part because real incomes are rising. There is no reason for the Fed to fuck with it.

It's hard for a lot of people to get that the current interest rate environment is normal historically speaking. The near-zero rates after the Great Recession and the subsequent pandemic situation were very much abnormal (and that was a 15-year period!). But the Fed should only cut rates if there is a recession, which will happen one day, but that is not clearly happening on the immediate horizon.

We haven't seen the full impacts of the current rate hike cycle. It typically takes 12-18 months for an increase in interest rates to trickle through the economy so the fed isn't changing interest rates to impact the current economic environment, but the one they see coming next year.

Totally agree regarding the abnormally low interest rates that we saw during the pandemic, however I believe a recession is not the only reason why the Fed would cut interest rates. I think the Feds current policy is overly restrictive, given the 2% inflation rate mandate, and the Fed will cut regardless of if we have a recession or what the unemployment rate does.

Ultimately I think the Fed was correct when they described the 2021 inflation situation as "transitory" (due to supply chain disruptions/abundance of stimulus $'s), it just lasted longer than expected.