I haven’t written a blog in a while because, well, there really hasn’t been anything new to say. It seems that the same real estate news that I was reporting last summer was regurgitated this past fall, repackaged in January, and recycled in the spring.
- Sales were humming along as they have for the past three years.
- There weren’t enough homes for sale.
- Buyers were engaged in bidding wars.
- Properties were selling significantly over asking price.
You know- the same ol’, same ol’…
That was all supposed to change this past week with the release of the latest inflation numbers followed by Jerome Powell’s comments after the Federal Open Market Committee’s June meeting. It was predicted that inflation had fallen and, as a result, the Ten Year Treasury would drop which, in turn, would cause mortgage rates to decline. Here’s what actually happened…
Indeed, the Consumer Price Index did show that the rate of inflation decreased from 4.4% in April to 4% in May. That’s quite a bit of improvement from last summer when the rate of inflation was 9.1%. Unfortunately, when you look at core inflation, which strips out the volatility associated with the prices of food and fuel, inflation clocked in at 5.3%. As a result, Chairman Powell felt compelled to state that the Fed would probably need to raise interest rates two more times before the end of the year. What was supposed to be a celebratory drop in mortgage rates, instead, dampened the excitement of real estate professionals and prospective buyers- all of whom were excited about an easier climate in which to engage in the purchase of real estate.
It reminded me of the time, back in 1990, when I hosted my very first cocktail party. I pulled out my recently purchased copy of The Silver Palate Cookbook and rifled through the recipes, landing upon one that I thought was an incredibly sophisticated offering- Salmon Mousse. I spent the day preparing for the event and triumphantly presented my culinary masterpiece only to have a guest loudly question whether my success wasn’t actually prepared with tuna fish. Despite my protestations, my Michelin-star achievement had been relegated to a tawdry imposter and sat on the counter slowly melting into a gelatinous, greasy soup. Sure, the event had been modestly successful, however, there was that one blemish that marred the entire experience. Anyway, back to real estate…
Ultimately, at the end of the week, the Ten Year Treasury closed higher than its opening five days earlier. As a result, the 30-Year Fixed Rate Mortgage rose slightly, closing at 6.95%. This was not the movement that we were expecting and, sadly, it looks as if, in the short term, we’re going to be saddled with the same stultifying rates that have hampered robust housing commerce for the past year. For what it’s worth, Freddie Mac, Fannie Mae, The National Association of Realtors, The Mortgage Bankers Association and others continue to speculate that the tightening cycle of monetary policy is reaching its apex and, before year’s end, mortgages will have dropped significantly. Their predictions range from 5.5% to 6.4%. While I honestly believe that relief isn’t too far off, I’ve also reached that point in the recessionary cycle where I’m simply throwing my hands up in the air, going about my job as an agent, and muttering the words, “I’ll believe it when I see it.”
Inflation isn’t the only factor contributing to lofty mortgage rates. Another perpetrator is “the spread”– the gap between the 10-year Treasury yield and the 30-year mortgage. The delta between these two figures represents the mortgage lenders’ profit margin. I won’t dive too deeply, however, lending institutions’ spread is, historically, less than 2%. Lately, it’s been higher than 3% and that additional percentage is passed along to the borrower in the form of higher interest rates. Sadly, the spread won’t come down until some economic uncertainty- inflation, the possibility of a recession, or regional bank closures- has diminished. Until then, higher rates will prevail and the national malaise will continue.
Until recently, Rochester had been shielded from this national unease. As everyone is aware, if a structure had a roof and four walls, it seemed destined to sell with multiple offers- significantly over asking. Well, signs are emerging of a potential shift. In the past month, property inquiries, open house attendance, and offers on listings have all declined. If this is a trend and, unfortunately, I think that it is, there may be two factors at play: an increase in new homes hitting the market and buyer fatigue. Firstly, the number of new homes coming on the market has increased. It’s not a dramatic rise, nevertheless, we’re seeing more homes listed for sale than we have year to date. Concomitantly, colleagues are telling me that their buyers are exhausted. They’re both weary from losing bidding wars and they’re feeling dissatisfied with the quality of the available homes. More supply and less demand means that the market is going to be less vibrant until something changes.
I remain optimistic that deal flow will return, however, a couple of factors are required. Buyers probably need a break from real estate. Now’s the perfect opportunity to enjoy time on the golf course or at the pool. And, mortgage rates need to come down. If we’re lucky, the pundits that I referenced earlier are correct and lower rates are just around the corner. Hopefully, come Labor Day, the lending market will have improved and we’ll be back in business. Otherwise, we may be hoping for the arrival of an early spring market. Stay tuned…
If you have questions or concerns in regard to real estate, feel free to call me at 330-8750. Meanwhile, enjoy the warmth of the summer sun!!