Mortgage rates in US to snap three-year streak of gains, survey shows

Jan 29, 2024

MORTGAGE rates in the United States will decline this year, stoking optimism about the battered real estate market, according to the latest Bloomberg Markets Live Pulse survey.

The rate on a 30-year, fixed mortgage is expected to fall to 5.5 per cent at the end of the year, according to the median from 236 respondents. That’d be down more than a full percentage point from its current level of about 6.69 per cent, and the first annual decline after three straight years of gains.

High borrowing costs have caused sales of previously owned homes to slide to the lowest level in nearly three decades. They have pushed buyers to the sideline and led many owners to hold off from listing their properties for sale. But with the Federal Reserve signalling the potential for interest rate cuts this year, there’s a swelling consensus that borrowing costs will ease, helping to push 57 per cent of respondents to see real estate as a more attractive investment this year compared to 2023.

“The worst is over for the housing market, but a full recovery will be slow in coming,” Mark Zandi, chief economist at Moody’s Analytics, said. “Mortgage rates should continue to trend lower this year.”

Owners have been reluctant to list homes and give up the lower rates they snagged before borrowing costs started rising. That’s put a lid on sales. But as 30-year rates have eased off recent highs reached in October, the market began to loosen slightly. New listings rose 2.2 per cent compared with a year earlier, according to data from Redfin for the four weeks ending Jan 21.

It will likely take a much more significant drop to unlock the market. Only a tenth of survey participants said a 6 per cent rate would produce a meaningful increase in single-family inventory. Another 39 per cent said borrowing costs around 5 per cent would be enough.

Other parts of the real estate market may continue to struggle. Higher borrowing costs have walloped commercial property valuations and caused many owners to grapple with refinancing challenges. It is also weighed on real estate investment trusts. About two-thirds of respondents expect Reits to underperform the S&P 500 Index this year. Offices, in particular, have been suffering since the pandemic, when remote work led employers to cut back on space. Respondents were divided about the outlook for office demand globally, with 42 per cent saying that it will continue falling and 45 per cent expecting it to level off. Only 13 per cent of respondents expect office demand to rise this year.

The rapid rise in interest rates has only exacerbated office issues, as values plummeted and owners struggled to keep up with the growing costs. Brokerage Jones Lang LaSalle estimates that property owners with loans maturing to the end of 2025 will need as much as US$570 billion in new equity given how sharply values have fallen. A large chunk of that is concentrated in the US.

The distress has led to vast opportunities for a crop of investors who have amassed large amounts of dry powder. Buyers will likely favour higher-quality buildings in key locations, according to Marisha Clinton, senior director of Northeast regional research at brokerage Savills.

“Those will be the ones that are sought after by investors,” Clinton said. “The caveat is, they still have to watch those assets where there is a high amount of debt that’s maturing in the near future.”

The debt backed by an office building at 1740 Broadway in Manhattan is up for sale again at a roughly 50 per cent discount, after its owner Blackstone defaulted on the debt more than a year ago.

Cities including New York have pushed to allow for more conversions of old offices into residential properties, often in a bid to revitalise buildings that would languish as demand falters. While some conversions are getting done across the US, it is often an extremely costly and timely process that can be further complicated by zoning restrictions.

But when asked what should be done with empty offices, survey respondents overwhelmingly suggested converting the buildings, with many saying to turn the properties into apartments or condominiums. Buildings such as the one at 1740 Broadway are now being marketed as a potential office-to-residential conversion, as momentum builds to find other solutions to the commercial real estate woes.