The Federal Reserve announced its first rate cut in 4 years, according to Jeff Cox of CNBC. “With both the jobs picture and inflation softening, the central bank’s Federal Open Market Committee chose to lower its key overnight borrowing rate by a half percentage point, or 50 basis points, affirming market expectations that had recently shifted from an outlook for a cut half that size.”

Matt Carter of Inman reported that the Fed was widely expected to cut rates today, highlighting that the Producer Price Index (PPI) and unemployment claims bolstered the case for a significant rate cut. However, economists remained cautious and predicted a modest 25-basis-point reduction. Mortgage investors have already priced in several rate cuts. The odds of a 50-basis-point rose to 45% last week, up from 15% earlier in the week.

Candyd Mendoza of MPA highlights that rates have already been dropping. The average 30-year fixed mortgage rate fell to 6.20% as of September 12, down from 6.35% the previous week and 7.18% a year ago. This marks the lowest rate since February 2023, with rates softening in anticipation of the Federal Reserve’s next rate cut. Despite the decline, potential homebuyers remain cautious due to high home prices and supply shortages. The 15-year fixed mortgage rate also decreased, now averaging 5.27%. 

Source: MPA (September 2024)

Mendoza quotes Freddie Mac chief economist Sam Khater as noting: “Rates continue to soften due to incoming economic data that is more sedate…But despite the improving mortgage rate environment, prospective buyers remain on the sidelines, as they negotiate a combination of high house prices and persistent supply shortages.”

Demographics

The Joint Center for Housing Studies of Harvard University recently released a housing report highlighting demographic shifts in the market. Housing is grappling with rising costs for homeowners and renters, exacerbated by demographic shifts. Generation Z and Millennials, driven by a strong labor market and delayed household formation, are entering the housing market in significant numbers. Immigration also contributes to household growth, peaking at 3.3 million in 2023. However, these growing demands collide with elevated home prices, high interest rates, and surging rents, leaving many, particularly lower-income and minority households, burdened by housing costs. 

Source: Harvard University (September 2024)

“Further pressuring the housing markets are the nation’s shifting demographics. Housing demand will remain strong in the near term, fueled by the immigration surge, household formations among Gen Zers, and the large millennial generation’s shifting housing needs. However, demand is expected to slow over the longer term. Native-born population growth is decelerating and will soon turn negative as baby boomer mortality rates overtake birth rates. Immigration will then become the primary, albeit much less predictable, source of population and household growth.”

Orianna Rosa Royle of Fortune (subscription required) highlights that Gen Z’s expected transfer of wealth from their Baby Boomer parents is not meeting expectations. With $90T in wealth generated by their parents, only about a fifth of Baby Boomers intend to leave any money behind.

According to Aimee Picchi of CBS News, this may lead to a strain on family formation. Nearly a quarter of millennials and Gen Z adults without children plan to remain childless, primarily due to financial concerns. These adults, aged 18 to 43, cite a desire for financial freedom and doubts about affording the high cost of raising children, which now averages around $240,000 per child. 

Indeed, Deidre Woollard of Yahoo! News reports that despite predictions of a “silver tsunami” in which baby boomers would flood the housing market by selling their homes, many are choosing to age in place, keeping inventory low. A Clever Real Estate study found that 61% of boomers currently own homes, with 54% planning to stay in them for life—only 15% plan to sell within the next five years.

That said, Gene Marks of The Guardian reports that boomers are selling their small businesses in higher numbers. Baby boomers, who own about 51% of privately held businesses in the U.S., are selling their companies to younger buyers, particularly millennials. Despite high interest rates, the market for small business sales is thriving, with business owners securing 20% higher prices than last year. This wealth transfer, driven by the aging boomer population, is also influenced by favorable tax conditions and estate tax exemptions

Second homes

According to Lily Katz of Redfin, demand for second-home mortgages has hit its lowest point in eight years, with mortgage-rate locks down 13.1% year-over-year in August and 59.2% below pre-pandemic levels. High mortgage rates, rising home prices, economic uncertainty, and a sluggish rental market have made second homes less attractive. Some buyers opt to pay in cash to avoid high interest rates, while others are deterred by the rising costs of vacation properties and less opportunity for rental income.

Source: Redfin (September 2024)

The return to office work has also negatively impacted the volume of second-home purchases. “The slowdown in the second-home market comes after a surge in demand during the pandemic. Mortgage-rate locks for second homes skyrocketed a record 96.2% above pre-pandemic levels in October 2020 as wealthy Americans took advantage of ultra-low mortgage rates when many of them could work remotely from vacation towns. “

That said, a recent analysis by the National Association of Home Builders (NAHB) found that 17.5% of single-family and 8.6% of multifamily construction takes place in designated second-home areas, which account for 4.6% of the total U.S. housing stock. These areas are counties where second homes comprise over 10.3% of the housing stock, covering 788 counties. Since 2015, the market share for single-family construction in second-home areas has grown from 13.2% to 17.5%, though it has dipped from 18.3% in early 2023. Despite recent declines, second-home areas have seen stronger long-term growth in construction (9.1%) compared to non-second-home areas (5.1%).

Source: LBM Journal (September 2024)

“Although smaller, the market share for second home areas has also grown for multifamily construction. The market share was 5.5% in the fourth quarter of 2015 and is now 8.6%, a 3.1 percentage point increase. This increase in market share has been more volatile than single-family, as growth in construction has not been as consistent for multifamily in second home areas.”