Growing cities/metros, especially those not directly on the coast, will not be seeing any declines. People are fleeing rural areas and moving to Austin, Nashville, Charlotte, MSP/SP, Columbus, Pittsburgh, Phoenix, Denver, SLC, etc are not going to slow down
Housing market
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Growing cities/metros, especially those not directly on the coast, will not be seeing any declines. People are fleeing rural areas and moving to Austin, Nashville, Charlotte, MSP/SP, Columbus, Pittsburgh, Phoenix, Denver, SLC, etc are not going to slow down
At least in Charlotte it mostly seems to be institutional buyers in the actual city. People I work with generally buy in South Carolina if they're going to or a north suburb.
There's a lot of people in the millennial age range who graduated college to a smoking crater of an economy, struggled, finally were getting closer to being able to maybe get into owning a home, and have been hit with the double whammy of the housing market being absolutely nuts and now interest rate hikes. Especially so in more expensive areas or areas that saw their market heat up earlier than it did here in Iowa.
And it'll just get worse if it crashes again. Large institutional property companies will come in and pay cash on the discounted homes, leaving less inventory on the market for owning.
A 30 year loan from 2.5% to 5.5% will bump the payment by roughly 45%. That is a hit.
When factoring in all possible variables it could certainly make sense to rent in some situations. A home is likely to appreciate but add in projected expenses and sunk costs over time (furnace, garage door motor, etc) suddenly it doesn’t look quite as obvious financially. There are non-financial benefits that come with home ownership though.
Higher interest rates are going to crash housing and equity prices soon enough.
FRED says the average 30-year fixed last month was 5.11% and the all-time low was 2.77% in August.
A $500,000 loan at 2.77% (so assuming a $625,000 home with 20% down) is $2,047 per month.
If you bump the interest rate up to 5.11% but keep the monthly payment the same, then the loan amount would be $376,500 (which implies a new sale price of $470,625 for the home).
So the house's value shrank $154,375 (or a decrease of 24.7%) off that change in interest rates.
Keeping the loan amount at $500,000 (for the original $625,000 price) implies a monthly payment of $2,718, or $671 more per month than what I calculated at the lower interest rate of 2.77%.
So unless you think buyers collectively have that $671 per month in reserve to spend (obviously mix up the numbers for each individual transaction being its own snowflake but the point here remains unchanged), then there is going to have to be a cooling of the housing market. Higher interest rates that make it harder to amortize the debt over longer periods and invariably put downward pressure on prices.
The housing market is crazy. I live in Dubuque and feel it is a pretty affordable place to live and enjoy home ownership. There was a recent announcement that a developer was interested in building a large subdivision of sustainable/affordable homes. My first thought was awesome.
Then I just about coughed up my lunch when I read the following:
The development will fill a gap in Dubuque’s housing market, appealing to young professionals or first-time buyers who don’t need a large footprint, according to Mulligan. The homes, offered in eight different designs, will range in size from 925 to 1,830 square feet, with prices from the low $200,000s to the mid-to-high $300,000s.
Over $200k for a 900 sq ft home?
No expert, but I think the outlandish home prices in large metro areas is starting to crush middle America. Builders construct & sell "family" homes for a million in major metros. With building products in short supply and price going up, the materials folks are going to jack up the inputs for the Iowa builder, because they can just as easily sell to the material retailers on the coast.
No government wants to subsidize non-affordable housing, so that builder is competing with everyone else for labor, materials, land, etc.
If people want a cheaper new house this is probably a good idea. If they want a cheaper house but bigger, they'll need to buy an older house. What else do you suggest?
When I graduated from ISU in 1986, we had the talk about good/bad of buying a house at a young age. At that time he talked about 6-8% being a normal market range for mortgage loans.
Of course in the late 80's there were double digit interest rates. Heck, the business segment I worked for was charging around 20% for floor plan loans.
No, I didn't walk 5 miles to school up hill.
Relative to historical standards, under 10% is still a good rate. But relative to the Fed messing with history and the amount of easy money injected into this economy since 2000.... rates much higher than this mean a slap in the face to the millions of spoiled and leveraged borrowers.
Of course, back then the houses were massively cheaper. In Des Moines, homes that would be 50k back then are north of 200k now. And with smaller principal amounts it also made it easier if you had a little cash to make headway towards paying it off. An extra $100 thrown at the mortgage here and there will make an actual dent in a 40-50k loan. A much smaller one into the ones we have today.
Wife and I want to move, but this market is making me think that it might not happen right now.
We looked at a property pre-listing, and really liked it. Realtor then heard what the seller was planning on listing the house for. They lived in the house for two years and will be posting it at ~45% above what they paid on it. They did some work to the house, but not enough to make it 45% more valuable. Sad thing is that a similar house down the road, but a bit less nice, sold for the same price this house will get listed at.
We looked at a property pre-listing, and really liked it. Realtor then heard what the seller was planning on listing the house for. They lived in the house for two years and will be posting it at ~45% above what they paid on it. They did some work to the house, but not enough to make it 45% more valuable. Sad thing is that a similar house down the road, but a bit less nice, sold for the same price this house will get listed at.
Not suggesting anything. But the days of buying a nice house, in a nice neighborhood for $200k are probably long over. I did exactly that in 2012.
But part of the issue might be government subsidies of housing development projects. Here are excerpts from an article describing another Dubuque development - senior apartments.
A developer has announced plans for an affordable housing complex in Dubuque, shortly after the cancellation of a different housing project in the same area.
The Landover Corp., based in Lake Barrington, Ill., intends to construct a 50-unit senior housing complex at 2000 Radford Road, pending the approval of state tax credits that would assist in funding the project.
.........
Richard Sova, president of Landover Corp., said he intends to invest about $10 million in constructing the three-story apartment complex that would provide both one- and two- bedroom units. The units would be made available exclusively to seniors.
However, Sova said Landover Corp. is applying for housing tax credits from Iowa Finance Authority that could fund up to 80% of the project and those tax credits are needed for the project to move forward.
“It’s a very competitive process,” Sova said. “They don’t fund near as many of these projects as we’d like, but we’re going to try.”
If funding is secured, Landover intends to begin construction on the project in spring 2023 and have it completed by spring 2024.
If government entities are willing to step in and fund a high % of a project's cost, seems to me the incentive to build wisely becomes secondary and naturally leads to price inflation.
This is the issue… people are over extending themselves to keep up with their friends, family, co-workers, and neighbors… A lot of people will stretch and pay the $671 more per month to try to make it work… and then something happens and they can’t make it work anymore.
The ppl that are going to get burned are buying homes at 5.5-7% interest. I bought my house in 2018 and was pretty upset that I got 4%. I refinanced for 3.3% last august. I’m pretty confident that home prices will level off and the folks in the 2.3-4% range will be pretty solid. When I bought my home, my coworker who had bought in 2012 told me that 4% is a really good deal. It’s interesting to get perspective on folks that bought 10 or so years ago.
Higher interest rates and a recession could potentially change things in a hurry. I haven't thought through all the possible ramifications, as we wouldn't necessarily be impacted as far as I can see (don't have investment properties, aren't looking to move, and didn't stretch ourselves when we bought almost 15 years ago), but I see a few potential red flags.
One big one is the advertising of properties to investors. People were flush with cash because of all the stimulus, and the low interest rates were also obviously super appealing. Add to that the growth of VRBO and Airbnb over the last 10 years...I'm a little concerned we have a bit of a growing investment bubble. It's an intriguing investment, but I know a lot of these people plan to be able to pay for their mortgages by getting at least 12 weeks of max rental rates (the weekly rate equaling at least 1 month's mortgage). Then they need off-peak weeks to pay for insurance, taxes, upgrades, and make a profit. If we run into a recession, and people aren't able to take vacations the way they have been, these investors aren't going to be able to pay their mortgages, so they're going to start to flood the market with rental properties. That would help alleviate the housing shortage problem, but it would also start to make home prices drop. That of course could amplify the problem for those investors and possibly accelerate the desire to get out - they don't want to lose money on their investment. Could be interesting. Hopefully that doesn't happen. Interested to see what other angles the rest of you see.
One big one is the advertising of properties to investors. People were flush with cash because of all the stimulus, and the low interest rates were also obviously super appealing. Add to that the growth of VRBO and Airbnb over the last 10 years...I'm a little concerned we have a bit of a growing investment bubble. It's an intriguing investment, but I know a lot of these people plan to be able to pay for their mortgages by getting at least 12 weeks of max rental rates (the weekly rate equaling at least 1 month's mortgage). Then they need off-peak weeks to pay for insurance, taxes, upgrades, and make a profit. If we run into a recession, and people aren't able to take vacations the way they have been, these investors aren't going to be able to pay their mortgages, so they're going to start to flood the market with rental properties. That would help alleviate the housing shortage problem, but it would also start to make home prices drop. That of course could amplify the problem for those investors and possibly accelerate the desire to get out - they don't want to lose money on their investment. Could be interesting. Hopefully that doesn't happen. Interested to see what other angles the rest of you see.