What Do Shipping Containers and Interest Rates Have in Common?
Russel Sage, who lived from 1816 to 1906, said that “Real estate is an imperishable asset, ever-increasing in value. It is the most solid security that human ingenuity has devised. It is the basis of all security and the only indestructible security.” Over 100 years later, his truth is our truth. Real estate continues to increase in value and ensure financial stability and security for many. It is and will continue to be one of the best ways to develop long-term financial freedom. Yet, the risk we are facing today is real estate becoming increasingly unaffordable. As stagflation becomes more prevalent a conversation, we must look at increasing prices as an increasing divide between those who own and those who rent.
The price of all things is up. August Consumer Price Index, the most recent report, reflects prices up 5.3% year-over-year. CoreLogic’s most recent August real estate report shows year-over-year appreciation up 19.7% nationwide, 21.3% in Denver’s metro. Not only are prices up, but the Denver market continues to lead the country in its recovery from the Great Recession’s loss of home prices, with our homes now worth 102% more than they were at their peak in 2006.
DMAR’s October Market Trends Report illustrates signs of our market trying to find normal seasonality while the lack of supply weighs heavy. It is a story being played out on a much broader global market. Manufacturing is stifled by energy rationing, lack of microchips and raw materials, and workforce limitations. The cost of shipping has increased sixfold in the last year. And a lack of dockworkers and truck drivers make moving product expensive and tortuous once those shipping containers eventually make it to shore.
All of this has an impact on housing.
On what we can build, remodel, and sell.
Closed Homes for September Continue to be Strong
While down 13% month-over-month and 19% year-over-year compared to 2020, the 5,233 homes that closed are in Denver’s 2013 to 2019 September sweet spot, where homes sold ranged from 4,400 to 5,250. There is a saying that high prices are the cure for high prices, that eventually people will simply stop believing a thing is worth as much as being charged. However, what we are seeing play out in our housing market today is much like what’s going on in the stock market, if a price seems too high and its demand dips ever so slightly, there are a line of people willing, ready, and able to purchase on those dips. This cycle is keeping home prices relatively stable and upward for now, as highlighted in the average and median price changes. September had a 15% increase in average and median closed prices, which moved only half a point from last month. The Closed-to-List metric dropped 0.6% to 101.9%, which seems significant, but it speaks more to sellers pricing right and fewer buyers up bidding each home. Notably, it is still 1.62% higher than Fall 2020, when mortgage purchase applications were 12% higher, and the real estate market felt like a frenzy.
Supply is Still the Problem
Supply is still the problem, has been the problem, and will be the problem going into 2022. We all know the why. Builders stopped building when COVID first crippled us and have struggled to keep up ever since. Many homeowners are not quick to sell given rate lock, incredible equity, and the increased price of moving. Active inventory reflects this by measuring down 25% from last year. To put it into perspective, inventory has been below 3,000 five times in 2021 after dropping below 3,000 for the first time in December 2020. As I mentioned earlier, our closed homes are right in line with 2013 to 2019.
Inventory . . . not so much. Active inventory ranged from 7,500 to 9,200 at September’s month-end during those seven years. September 2021 ended with 3,971 homes for sale, double what we had in March, while half of what was normal, giving us 0.75 months of inventory.
Higher Interest Rates Will Impact Demand
Higher interest rates will undeniably impact our demand, making it harder than it already is for first-time homebuyers to call Denver home. However, strong demographics, 26 to 32-year-olds, a record-breaking stock market, and off-the-charts homeownership equity will keep overall demand high. What will begin to happen is a shift, mobility due to affordability limiting our access to entry-level employees, an increasing cost of wages, and a higher cost of small business services.
Macroeconomics would tell us that as rates go up, the economy slows, and inflation goes down. That assumes a supply relative to demand. Today, we have an abnormal constraint on supply, keeping the price of things higher.
Rates are not unaffordable yet. They will be. Mortgage rates rose at the end of September to 3% as the 10-year U.S. Treasury yield reached its highest point since June after hovering around 2.875% for 2 ½ months.
While rates are still comparatively and historically low and home prices are lower than they will be tomorrow, there is a silver lining for today’s homebuyer. Lending is getting easier. In the five months since Sandra Thompson was appointed as acting FHFA Director, she has implemented the following actions to ease the struggle of homeownership:
- Increasing the conforming loan limit to $625,000
- Allowing for 12-month rental payments as a credit compensating factor
- Averaging the credit scores of all buyers, instead of using the lowest
- Pausing the 6% limit on homebuyers with a greater than 45% debt to income ratio, less than a 680 credit score, and less than 10% down
- Pausing the 7% limit on 2nd homes and investment properties, and
- Canceling the 50 basis point refinance fee, giving homeowners greater access to their equity to reinvest
These changes can give those looking to purchase a home an easier path to do so, but they too will not be sufficient to close the gap as interest rates and prices continue to rise. So as winter rolls in, we will continue to watch and talk about the impact of rates, the ease of supply constraints, and the prices of all things.
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