Is Real Estate Hyper Local? Or Globally Expansive?
In 2022, the industry will include housing buzz words like global impact, market velocity, inventory shortage, shifting interest rates, insatiable buyer demand, rising inflation, and affordability. The housing market has already undergone extreme stress over the last two years as the pandemic changed how we viewed our home. We saw the shift as workers could work from anywhere; families required a home gym, office and a classroom; urbanites fled to the suburbs; Baby Boomers decided it was cheaper and safer to age in place; and investors had so much liquidity they were buying anything up for sale. Demand pushed home prices up double digits while supply moved so fast it’s like it didn’t even exist.
Housing is a basic human need, providing shelter from the elements. However, it feels more like a commodity when median home prices increased from $400,000 in February 2020 to $575,000 in 2022, a 44% increase. Inventory is flying off the shelves with the median days on market totaling 4 days and at a multiple of 104.75% close over list. Corelogic shows Denver appreciated 19.1% over the last year alone and 60% of all homes are going for over asking. Redfin saw that bet and raised it to 76% of Denver homes are selling for over asking. Either way, it’s a hot sellers’ market.
In the fourth quarter of 2021, investors purchased 16.3% of all Denver homes, which is a 51% increase year-over-year, and they are not getting a deal on those homes. They are willing to compete. They know if “would be homeowners” can’t own, then they will rent, and with rents up 15.5% in Denver year-over-year per Apartment List, their money is making money. Local mom and pop investors aren’t the only ones who see the value in hanging onto their homes and building wealth through real estate. Investors are moving into markets with large investment pools and increasing foreign placement. Foreign holdings of U.S. asset-backed securities, which includes mortgage-backed securities, are up 5% year over year. Additionally, foreign holdings of all U.S. securities are up 19.5%. This increase in foreign purchases will continue to rise as sanctions on Russia creates a run on their banks, Ukraine’s devastation forces Ukrainians to quickly move their money out of the country and other European countries shield returns and offset risk.
The global impact of sanctions will affect our housing market more than just the liquidity we see circulating. It will continue to put upward pressure on a rising inflationary market, increasing the cost of everything. Just when everyone thought Federal Chairman Jerome Powell was behind the curve on controlling his once coined “transitory inflation,” all one can think is Powell is now thinking it too. Russia is the number one supplier of oil and gas for the European Union and the number one supplier of fertilizer for the world. The cost of gas and food just got higher. Ukraine is the number two supplier for Iron Ore and Manganese for Steel. The cost of iron and steel just went up. If China follows suit, Taiwan is the number one supplier of microchips. The cost of everything just went up.
The Federal Reserve will finish their Quantitative Easing program in March, and they originally planned on raising the fed rate three times to control inflation. Recently, the number of increases to occur jumped to seven times. Market moving conversations implied there would be a 50-basis-point (bp) interest rate increase in March and two 25 bp increases in May and June, speeding up the process for higher rates even more. Today, the market believes the Fed is resigned to a 25 bp increase in March, knowing their impact on inflation has been muted by current world events. Inflation that pushing long-term interest rates higher. Inflation is steeling our purchasing power of goods, services and yes, housing.
On February 14, we saw the 10-year Treasury push above 2% for the first time since March 2019. As the cost of inflation continues to rise, a fear of a Fed behind the curve, and an impending quantitative tightening pushed our 30-year fixed mortgage rates above 4%. When Russia first threatened invasion of Ukraine, bonds stayed flat trying to determine what cost would be incurred. Then, February 25 marked a change where a flight to safety offset inflation fears as investors started selling out of their higher risk and higher return options, such as bitcoin and stocks, for the safer lower return of bonds. We’ve seen this increased demand raise bond prices and pull the 10-year Treasury back below 2%, ending February at 1.73%.
This drop in rates is giving homebuyers, who are facing increasing home prices, a bit of a reprieve. Don’t get used to it yet because actions by the Federal Reserve in the coming months will affect mortgage rates’ trajectory.
As the Fed raises their Fed rate, tapers their balance sheet and tries to control a runaway inflation affected not only by supply chain issues and excessive demand but now by Russia’s determination, we will all watch interest rates play a stressful game of tug of war. Ultimately, interest rates will continue their upward trend until the Fed pushes us into a recession by slowing down the economy. Now, don’t let this alarm you. Remember, a recession is defined by two consecutive quarters of GDP decline. Since 70% of the GDP is consumer spending, a pullback in demand and a catch up in supply should not necessarily be considered a bad thing.
Today, I continue to advise my clients to not lock in a rate based on fear, but on the impact the rate has on the payment and their budget. If the Fed does raise the Fed rate enough to control inflation and slow down the economy, then we will see long-term rates go down and refinance opportunities return.
Until next time, that’s a wrap for this month’s Market Trends update.
It’s my pleasure to keep you updated.
Producing Branch Manager with The Rueth Team of Fairway Mortgage