Realtors not singing the home sale blues

Feature Home Sales

Judging by recent headlines, the housing market is heading for real trouble because of the Federal Reserve’s aggressive posture toward raising interest rates to quell inflation. But while the Fed’s more aggressive stance is not a figment of anyone’s imagination, a panel of local real estate executives and experts offered some historical perspective on interest rates and suggested that their main challenge in moving homes is not so much rising interest rates but the low inventory of homes for sale.

The panel members, speaking to a group of local realtors during a mid-September “Stark Summit” program on the direction of the housing market, also delivered some good news about the relevance of real estate agents amid the competitive threat posed by real estate technology companies.

But their first order of business was to calm any fears about the ability to sell homes with interest rates in the current 5% range, especially after more than a decade of historically low interest rates ushered in by the Great Recession of 2008–09. The panel included Mark Eppli, director of James A. Graaskamp Center for Real Estate at UW–Madison; Dave Stark, president of Stark Company Realtors; Paul Boomsma, CEO of LeadingRE; and David Simon, president of Veridian Homes.

Bringing the pain

The program came roughly one week before the Federal Reserve announced another rate increase of 0.75 percentage points, raising its federal funds rate to 3% to 3.25%, and indicated that its aggressive posture would be the norm until inflation — which rose 8.3% for the 12-month period that ended in August 2022 — gets back down to the preferred target rate of 2%. When the Fed raises its federal funds rate, that makes it more expensive for banks to borrow and they in turn pass on the higher costs to their customers, resulting in higher rates on consumer borrowing, including mortgage rates.

The Fed also released new economic projections that indicate a significant economic slowdown later this year and in 2023, which represented a departure from previously more optimistic guidance. “We have got to get inflation behind us,” noted Federal Reserve Chair Jerome H. Powell when announcing the latest rate increase on Sept. 21. “I wish there were a painless way to do that. There isn’t.”

Eppli did not downplay the toll inflation is taking and chided the Federal Reserve for previously rosy economic scenarios, which it maintained until the recent rate hike. With a soft landing now outside the realm of possibility, Eppli threw water on the notion that higher interest rates will crater home prices. Citing an analysis done by Laurie Goodman, an Institute fellow and the founder of the Housing Finance Policy Center at the Urban Institute in Washington, D.C., he noted there’s a slightly positive correlation between the two. But even with continuing appreciation in home prices, inflation is a problem that is going to be hard to bring back down, and rather than joining a chorus of dire predictions that the coming months could bring a repeat of the housing collapse of 2008, he predicts a five or six-month hibernation period before the housing market picks up.

A contributing factor is the short supply and strong demand for housing. Using the metric of population adjusted housing, he noted that in better times for the national housing market, there were 7.9 new housing units per additional person of population, but today that is down to four new housing units per additional person. Homebuilders are looking at a 5.5-million-unit shortfall, while Freddie Mac, the Federal Home Loan Mortgage Corp., has a 3.8-million-unit shortfall. “There is a shortage of housing, both rental and single family, that keeps prices maintained,” he notes. “That’s very different from where we were in 2007 and 2008.”

While supply is down, demand is robust for several reasons. First, there are about two jobs open for every job seeker, which gives prospective homebuyers confidence to take on a 30-year mortgage. Also driving demand is the sheer number of what he called “peak millennials” —roughly 4.8 million 28-year-olds — who are poised to become first-time homebuyers, and a historically high level of “checkable deposits” now is approaching the $4.7 trillion range, which bodes well for meeting down payments.

However, the “buzz kill” from a realtor’s perspective, is that when it comes to supply, baby boomers are aging in place, helping to reduce the “churn” in which people once sold their homes every 10 years. That churn rate now is once every 20 years, and since many existing homeowners have locked in lower mortgage rates — in the 3% range — than what will be available as the Fed increases its federal funds rate, they are in no mind to sell. “They are not leaving [their homes],” Eppli explains. “That is creating another supply problem.”

Picking up on that theme, Stark noted that so far in 2022, local home sales have underperformed historic norms every month due in part to the low inventory of available homes. “We don’t have an issue with mortgage rates and buyers,” he says. “We have an issue with sellers.”

Stark also took aim at what he called the media “freak out” over higher interest rates and new predictions of a housing collapse. In the run up to the year 2000, he recalled, mortgage rates were in 6% range, and some thought the mortgage market was overheated. More recently, in November 2018, mortgage rates were at 4.87%, and as recently as April of this year, they were at 4.98%. “So, as recently as four years ago, we had virtually the same mortgage rate and I do not recall people freaking out over virtually a 5% rate. Do you?”

Stark, who predicts the local average per-sale price for homes will settle somewhere between $375,000 and $400,000, also derided predictions that home prices will crash. With low inventories, sellers are not in a panicky selling situation, and with more than $4 trillion in cash sitting on people’s balance sheets, there is plenty of cash to move when more homes go on the market. With these market dynamics, “tell me how prices are going to fall?” he asked. “That’s not going to happen.”

Perhaps the most telling historical perspective was offered by David Simon, who started his homebuilding company in 1981. That year, mortgage rates reached their highest point in modern history with an annual average rate of 16.63%, according to Freddie Mac data, so he’s less concerned about the current rates as he is about the inflation that could drive rates even higher.

Simon recalls that FOMO (fear of missing out) drove the low-rate market over the past several pandemic-influenced years, and even though he likes Eppli’s short-term forecast, he believes a housing comeback could take a bit longer than six months. “I love your slides about a six-month hibernation and then life goes on,” he told Eppli, “but I don’t have a lot of faith that we’re not going to get a harder landing because it may take a little more work to stomp out inflation.”

Parting shot

Meanwhile, Boomsma had some mischievous fun chronicling the financial woes of several real estate technology companies, which he says should have fared better during the pandemic but instead have reported losses — in some cases astronomical losses. With that in mind, Boomsma also posed the following question: With all these new technologies, do we still need real estate agents? His conclusion — a resounding yes — came before repeating some new spin on an old joke about the airline industry. This time, the target of the joke was — you guessed it — real estate tech firms.

“If you want to earn millions of dollars,” he said, quoting a professional colleague, “start with billions of dollars and launch a real estate tech company.”

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