Friday, January 28, 2022

Economic Pressure is Mounting

The wild stock market last week was one of several indicators that money is moving into different channels. The feds have definitely over inflated the money supply in the name of "COVID aid" and we are seeing the realities of that now. Inflation is reaching the levels we saw in the late 1970s and early 1980s. Volatility in the investment market is obvious.

What this means to housing is unclear as these conditions have sometime aided real estate and sometime harmed it. Harm can come if interest rates were to spike hard. This long period of below average rate has led a whole generation of homebuyers to presume that 4% is "normal." It is not, in fact the average over the last 50 years is around 6% and that has come down from 6.8% ten years ago. This long period has eroded the average. A healthy range for mortgage interest is 5-6% that provide ample access to the market and generates yields that are attractive to investors. But from the vantage point of anyone under the age of 40, 6% is high.

The real question is how will the real estate market react when rates start to rise to "normal" levels. It is safe to say that many people that qualify now will no longer qualify. Taking buyers out of the market will effect the positional strength of current sellers. Tat will lead to less offers, less competition and more room for buyers to negotiate. That alone is valuable, but it could remove enough buyers to create a glut in the market that could lead to a pricing downturn. Right now we have tight inventory. It is so tight I believe it is unhealthy, so perhaps some upward movement on rates with bring balance to the market. That sounded so Jedi, didn't it?

Buyers that are qualified now at less than $500,000 purchase price need to act soon. Even a 1/2% increase in rate will likely knock you out of the local market. The idea of sitting on the fence hasn't made sense for several years. Pull the trigger before the market unloads your weapon. "Weapon?" Yes the weapon is easy and inexpensive access to capital, ie. mortgages. The market may end up "unloading" the cheap money 'weapon'. 

This past month has been a train wreck to interest rates. That may settle down, but there is a great deal of uncertainty in the global financial markets and that generally doesn't bode well for lending. When things settle down, perhaps a retreat to cheaper rates is possible, but I am bearish on low rates. We should be closer to 'normal' and I believe we are headed back to 5.5% to 6.5% as a fluctuating range for mortgages. 

Friday, January 14, 2022

2022 Real Estate Outlook

I often get asked about what the new year looks like for real estate. That is always a challenging question because the robust market we enjoyed the last several years has been mostly driven by low interest rates that has made home ownership available to a wider range of buyers.

The Fed has been buying up loans and helping to keep the 30 year mortgage rates between 2.5% and 4.5% for nearly a decade now. The government has also spent record amounts of cash to battle the COVID pandemic and that is placing a huge pressure on the economy as inflation has gotten out of hand. Inflation can become a relentless and destructive monster if not handled appropriately. Typically making money a little more expensive will help. Interest rates will have to rise a bit and as that happens those at the lower end of the economic ladder will no longer be a bale to afford a house. As buyers leave the market place, pricing on homes could contract a little. 

Inflation can also make it much more expensive to fix up a fixer house and that can lead to lower prices as well for homes that are not in the best shape. New homes will likely face upward price pressure from inflations as the cost of materials rises. Furthering the problem is the supply chain issues that seem to have the Federal Government baffled. That is adding even more inflationary pressure. 

I believe that 2022 will see significant increases in the cost of new construction but a serious softening in the price of a fixer house. Now more than ever in the last 20 years, fixing up your house before selling is a very good idea. Well maintained homes in excellent condition should be a great opportunity for following the new home market upwards but older and run down homes may see the bottom fall out from under them as buyers get priced out with higher rates and repair costs sky rocket. The return of investor buyers or the so called "flippers" could happen later in the year if rates rise, inflation contuse, and supply chain issues are not dealt with.

Overall the local market has already seen a slight shift towards the buyers. It remain mostly a sellers market, but much closer to neutral than it has been for the last few years. I have always said I prefer a neutral market as that tends to keep both parties in a transaction reasonable and willing to work with each other. I would imagine that we will see modest growth through the first half of the year with single digit annualize price growth on resale homes and a possible slow down in the second half with very slow price growth and possibly depending on rates some price relaxation.

I would expect to see more modest increases in home values this year than last, but if you remember I said that last January as well. I was dead wrong last January as 2021 saw 18% price growth. But this year is definitely different, we are seeing runaway inflation and continue to have supply chain issues. This is not a sustainable condition for rising real estate particularly older and poor condition properties. New housing could slow down significantly as materials and expensive borrowing cuts into profits. There is only so much a local market can support in price and we are dangerously close right now with new 1500 foot ranch style homes running in the low 500s.