December 2023 Real Estate Market Update
The real estate market has seen some positive signs thanks to a gradual decline in the interest rate, spurring an increase in both new mortgages and applications for refinancing. However, the residential real estate market is still hindered by high home prices and limited inventory, which has placed the bulk of available homes out of reach of many prospective buyers. The commercial real estate market, meanwhile, is suffering from the opposite problem, dealing with a glut of inventory and few people looking to purchase.
Lower Interest Rates Spur New Residential Buyers
The interest rate for a 30-year fixed rate mortgage with conforming loan balances dropped from a high of 7.76% in the first week of November to 7.03% a month later. This dramatic decline in the mortgage interest rate was caused by the Federal Reserve choosing to back off its aggressive anti-inflationary policy, which had been pushing up interest rates for around two years. This has spurred a slight growth in the number of people seeking to purchase new homes, as interest rates cease to be quite as daunting as they were before.
Refinancing For Existing Mortgages on the Rise
The biggest impact from the lower interest rate was not from new residential sales, however, but instead was from refinancing. Applications to refinance existing mortgages jumped by around 14% in December, which is about 10% higher than they were the same time last year. This is due to interest rates falling to a point where existing homeowners may see a real benefit from refinancing their existing mortgages, potentially to a lower interest rate than they had previously.
Residential Real Estate Suffers Affordability Issues, Lack of Inventory
Despite the drop in interest rates, however, the residential real estate market is still suffering from a serious affordability issue. Home prices overall remain high, due in part to limited inventory that has not kept up with demand. And with interest rates still high, many sellers are reluctant to put their homes on the market, out of fear they will not be able to get mortgages anywhere as favorable as what they have on their current homes.
Commercial Real Estate Has Too Many Sellers, Not Enough Buyers
On the other hand, commercial real estate is dealing with the opposite problem of the residential real estate market, suffering from having far too many properties on the market relative to the number of prospective buyers. While there has yet to be a serious market-wide downturn thanks to private efforts to renegotiate existing mortgages, it has become clear that demand for commercial real estate is unlikely to come back anytime soon. This has left many current commercial real estate owners in a tough spot, with some seeking out potential solutions to avoid risking default on mortgages for buildings they no longer need or use.
