Earlier this year, we welcomed Rick Davidson to Plotify's Expert Corner. Rick, the current Chairman of Cairn Real Estate Holdings and Former Century 21 President and CEO, discussed the lack of transaction activity in the housing market and what he thinks could ultimately cause an uptick in home sales. Listen to the full interview on Spotify to learn more about his perspective on current housing market conditions.
“There’s a lot of locked up inventory and as a result of that there is a lot of pent up demand. I think as we see mortgage rates moderate ... I think that we’ll see a pretty significant pick up in sales”
Home Sales Outlook: Rick noted that we have seen a slight year-over-year uptick in monthly homes under contract data. While this is an encouraging sign, he was quick to point out that pending home sales reached lows in 2023 that we had not seen since the global financial crisis - and therefore, he was hesitant to say that the transaction market has fully thawed. Moving forward, Rick is laser-focused on mortgage rates to inform his view on the level of housing transactions.
Mortgage Rate Outlook: Rick believes we could see an incremental uptick in pending home sales if mortgage rates moderate to the low 6% range vs. their current level of above 7%. He pointed out that some housing experts have speculated that this could occur in the fourth quarter of 2024.
Many investors remain focused on whether or not the Fed will lower the federal funds rate, but Rick is more focused on the 10-year Treasury Yield, which are typically viewed as the benchmark for mortgage spreads. There is a current 2.70% spread between 30-year fixed mortgage rates and 10-year Treasury Yield. Historically, we've seen a roughly 1.75% spread, so we may see compression between mortgage rates and Treasury Yield in addition to lower rates.
While the Fed's actions will impact both, Rick cautions investors to avoid being narrowly focused on the federal funds rate and believes it's more important for investors to track the direction of the 10-year Treasury Yield and the associated mortgage credit spreads.
Monthly Payments and Locked-Up Inventory: In the long term, Rick thinks we need a more meaningful decline in all-in mortgage rates to drive home sales to more normalized levels. Nearly 80% of homeowners today have a mortgage with an interest rate below 4%. Many homeowners with low mortgage rates have made potential sellers hesitant to trade up to a new home despite the home equity created by recent home price appreciation. Many homeowners are working to calculate their monthly payments when weighing the benefits of trading up to a larger home or a more expensive neighborhood - and deciding that it is too costly to make the decision. In the long term, Rick thinks less than 6% mortgage rates could induce would-be sellers to list their homes and create more normalized transaction volumes.
Affordability and Long-Term Perspective: Within the wider conversation, Rick offered many additional insights, including his views on housing affordability and why it's driving a robust rental market, the level of cash transactions in the market right now, and the longer-term housing inventory shortage as well as his view on the ability of homebuilders to narrow that gap. Within the session, Rick touched on key markets, such as Austin, Boise, Salt Lake City, and Pittsburgh. Don't miss out on listening to the full podcast to learn more about Rick's outlook and perspective on the housing market.
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