In preparation to write this article every week, I do a lot of reading and sometimes I “borrow” other’s writings if they are salient. Much discussion has been had about the recent prime interest rate increases and what the Federal Reserve will do during the upcoming June meeting.
As discussed below, Fed member Lori Logan from Dallas is of the belief that more interest rate hikes are needed which a lot of us feel isn’t the right approach now particularly in view of the number of rate hikes in the last year (eight).
The issue many have with those rate increases is that it nominally takes 18 months for the effect of a prime interest rate change to manifest which begs the question of too little or too much?
Too little and inflation rages on and prices of everything rises. Too much and the economy suffers due to higher cost of borrowing money which impacts business investment and real estate purchases (Come on, you knew I’d bend the conversation around to real estate at some point). And that is exactly where the real estate market is today.
Prices have not fallen as economists predicted due to curtailed inventory, and sellers are not flocking to come onto the market because they are “owned” by low interest rates (Why would someone want to sell and lose their 2-3% interest rate then turn around and purchase with interest rates over 6%?)
Consequently, many of us, me included, are not coming onto the market because where would they/we go? As stated, prices have remained firm, so we’d be buying something smaller but very expensive and with the higher cost of interest rate money. Tough dilemma.
Now if a person had a destination in mind for reasons like moving closer to family or a job transfer, then now is a terrific time to come onto the market since our median price in the Fallbrook area is $995,000 (As crazy as that sounds, it’s true).
Below is a piece that I borrowed from Dana Copeland of Cross Country Mortgage. I have known Dana for 20 years in the real estate business and he knows his stuff. By the way, Dana’s article is written at the macro level across the nation which is why his numbers are at variance with mine because I write at the micro or local level. I enjoyed his article and hope that you will too.
Low inventory affecting pace of existing home sales
Stocks are higher and Mortgage Bonds are lower once again, being pressured by the debt ceiling fears. There has been some recent progress, which points to a potential deal being made over the next week. but there is a lot of uncertainty. As we have covered in a previous update, there is a supply issue that is causing Bonds to move lower and yields to move higher. Besides banks that are being forced to sell their Bond holdings to come up with deposits for their customers, if the debt ceiling is raised, the Treasury will have to issue Bonds to come up with the money. This would create an additional supply that has to be absorbed by the market.
The latest from the Fed – Lori Logan, Dallas Fed President says the current data doesn't justify a pause. She is in the camp of another rate hike...how disconnected can she be? We will hear from Fed Chair Jerome Powell tomorrow, ahead of the Fed Minutes next week.
Existing Home Sales
Existing Home Sales, which measures closings on existing homes, showed that sales were down 3.4% in April at a 4.28M unit annualized pace, which was in line with estimates. On a year over year basis, sales are down 23%. The slower pace of sales is all due to inventory, which remains extremely low.
Inventory levels increased slightly to l.04M, but still remain very low. There is a 2.9 months' supply of homes, which is tight because 4.6 months is considered normal. But if you look at active listings, there are only 563,000, as many of the homes counted in existing inventory are under contract.
The median sales price of $388,800, which is up 3.5% from the previous month, but down 1.7% on a year over year basis.
Remember, the median home price is not appreciation, but rather middle-priced home. That means that if more lower priced homes are selling, this number will fall. You could have all home prices increase, but the median price fall, if more concentration of sales were on the lower end. Actual appreciation numbers are higher, not lower, on a year over year basis, and are showing acceleration.
Homes remained on the market on average for 22 days, down sharply from 29 days, showing you that the lack of sales is due to inventory, not demand; 73% of homes sold in less than 30 days, up from 65%. If the home is priced correctly, it's selling fast.
First Time Home Buyers accounted for 29% of sales, which was up from 28% in the previous report. Cash buyers accounted for 28% of sales, which was up from 27%. That means that roughly 40% of homes with a mortgage are from first time home buyers. Investors made up 17% of transactions, which was unchanged. They made up roughly one out of every six transactions...Clearly investors are seeing the opportunity in housing right now.