Key takeaways
Rising mortgage rates are again creating headwinds for the housing market.
While existing home sales rallied in October, new home sales fell.
The interest rate environment is also slowing investor demand for REITs.
Through much of November, mortgage rates continued a mostly steady two-month climb, further slowing an already struggling housing market. Mortgage rates tracked with yield increases on other longer-term securities, such as 10-year Treasury notes. By late November, the average 30-year mortgage rate, which was close to 6% in September, topped out at 6.84%.1
October’s existing home sales jumped 3.4% from the prior month, at least temporarily stemming a downward trend dating back to February 2024.2 “This may only reflect month-to-month volatility in existing home sales data,” says Rob Haworth, senior investment strategy director with U.S. Bank Asset Management. “September’s lower numbers may have been influenced in part by the effects of hurricanes, and October’s gain appeared to represent a bounce back from that.” Existing home sales jumped 2.9% for the one-year period ending in October, the first year-over-year increase since July 2021.2
Lagging existing home inventory continues to create obstacles to a healthy housing market. “Higher rates are making people in homes financed with low mortgage rates reticent to move,” says Haworth. “The challenge is we ultimately need more homes.”
“The combination of rising home prices and elevated mortgage rates means that housing affordability remains a meaningful problem,” says Rob Haworth, senior investment strategy director with U.S. Bank Asset Management.
While existing home sales were up in October, there was a significant decline in new home sales. According to estimates of October activity, new home sales declined 17.3% from September and were 9.4% lower than a year earlier.3
“Today’s mortgage rates reflect higher yields in the bond market, but also a relatively wide premium spread between 10-year U.S. Treasury notes and mortgage rates,”4 says Haworth. “Part of that is due to the Federal Reserve (Fed) continuing to trim its holdings of mortgage-backed securities.” Haworth says that reduces market liquidity. “The Fed's actions, along with a decline in foreign-backed buyers, requires domestic investors to absorb the supply in mortgage-backed securities.” That contributes to continued elevated yield spreads, particularly compared to where they stood in early 2022 before the Fed began significantly raising short-term interest rates.
Home prices reached all-time highs from February through July of this year. However, for the first time since January 2024, home values declined modestly in August and in September fell some more.5
According to the residential real estate brokerage firm Redfin, the median monthly mortgage payment in November 2024 (based on average 30-year mortgage rates and home prices) was $2,593, only 0.5% higher than a year earlier.6 “The combination of elevated mortgage rates and higher home prices means that housing affordability remains a meaningful problem,” says Haworth.
Some investors seeking to enhance portfolio diversification turn to real estate investment trusts (REITs). REITs, which lagged the broader S&P 500 since 2022, regained some ground with strong third quarter 2024 performance. During the third quarter, the S&P Developed REIT index gained 16.40%, compared to 5.89% for the S&P 500 index. However, through November 25, 2024, REITs on a quarter-to-date basis lost 2.31% while the S&P 500 gained 4.10%. Year-to-date through November 25, the Developed REIT Index is up 11.39%, far below the S&P 500’s 27.09% gain.7 “We haven’t seen an all-clear yet that indicates pricing is cheap,” says Haworth. “But it does look like we avoided the worst of the problems that could have potentially beset the real estate market.”
Be sure to consult with your wealth management professional to determine when and how real estate investments might be a good fit for you.
Housing prices fell over a seven-month period in 2022 and early 2023 and housing demand dropped when mortgage rates first began to rise. However, housing prices recovered to new record levels in late 2023. After declining in three consecutive months in late 2023 and early 2024, housing prices recovered beginning in February 2024 and reached new all-time highs in consecutive months from March through July 2024. In August and September, housing prices modestly declined.5 Still, homebuyers must deal with dual challenges of persistently elevated mortgage rates and rising home prices.
The decision to purchase a home may depend on many factors, including your own personal priorities and financial situation. Some people may require a larger living space or have a desire to settle in a specific community. Those priorities may take precedence over the current mortgage rate environment. “Some people will also buy the home that appeals to them regardless of mortgage rate conditions,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. “Finding a different home down the line does not automatically substitute for the preferred house you find today.” While in an ideal world, mortgage rates would be more affordable, each potential homebuyer must determine the right time to purchase a house.
Interest rates began moving up in 2022, and mortgage rates followed suit. Today’s mortgage rates are close to double the rates that existed in 2021.1 That likely means that homebuyers are required to make higher monthly mortgage payments. This caused some potential homebuyers to step back from the housing market. At the same time, it led some current homeowners who potentially were interested in moving to a different house to hold off doing so, and preserve their current, low mortgage rate. Therefore, housing activity has slowed significantly, attributable primarily to the recent change in the interest rate environment.
As interest rates change, learn what the ripple effects across capital markets may mean for investors.
Investing in a real estate investment trust (REIT) is a way to diversify your portfolio. Here's a look at how to invest in REITs and diversify your portfolio into residential and commercial real estate.
Equal Housing Lender. Deposit products are offered by U.S. Bank National Association. Member FDIC. Mortgage, Home Equity and Credit products are offered by U.S. Bank National Association. Loan approval is subject to credit approval and program guidelines. Not all loan programs are available in all states for all loan amounts. Interest rates and program terms are subject to change without notice.
