Key takeaways
Rising mortgage rates are again creating headwinds for the housing market.
Despite the higher rates, November’s existing and new home sales grew.
REIT performance suffered as rates rose toward the end of 2024.
After declining to as low as 6% in late September, the average 30-year mortgage rate moved higher in 2024’s closing months, ending the year at 6.87%, just shy of its 2024 high point.1
November’s existing home sales jumped 4.8% from the prior month, the second consecutive month of gains.2 “It’s encouraging news,” says Rob Haworth, senior investment strategy director with U.S. Bank Asset Management. “From a historical perspective, however, housing activity remains low, but the latest data indicate that the market isn’t deteriorating.” One of November’s most encouraging signs was that existing home sales increased by their highest level for the year-over-year period since June 2021, jumping 6.1%.2
“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.
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.”
New home sales rebounded from a disappointing October. According to estimates of November activity, new home sales rose 5.9% from October and were 8.7% higher 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. “Major tightening in the 30-year mortgage to 10-year Treasury spread will likely require a change to the Fed’s current policy of reducing its mortgage-backed securities holdings.” In December, due in large part to an upturn in 10-year U.S. Treasury yields, the spread between 30-year mortgage rates and 10-year Treasury yields narrowed to its lowest level in more than a year.
Home prices reached all-time highs from February through July of this year. However, from August to October, home prices fell, based on the Case-Shiller Home Price Index. However, home prices have declined less than 1% from peak levels.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 $2,519, the lowest level since September 2024, but 7.1% 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, rising fourth quarter interest rates took a toll on REITs, which declined 8.84% while the S&P 500 gained 2.41% over the same period. For all of 2024, the Developed REIT Index gained just 3.94%, far below the S&P 500’s 25.02% return.7 “REITs fourth quarter struggles can be attributed in large part to rising rates and some year-end tax-loss selling in specific securities,” says Haworth. “These appear to be short-term factors, and there’s reason to think the REIT environment will improve going forward.”
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. From August through October 2024, 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.
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