It might as well have been the Biltmore Estate. As I rounded the corner, Vanilla Ice’s “Ice Ice Baby” playing on the radio, I found myself in front of 257 Barton Street- the new house that I had just purchased in the 19th Ward. Three years earlier, I had graduated from the University of Rochester and had spent the ensuing time working at the State Health Department, supplementing my income by tending bar on the weekends. I managed to save $5000- enough of a down payment to secure a mortgage- and I had begun the journey of purchasing and renovating what I hoped would become a portfolio of high-end rental properties. It was the year 1990 and the interest rate on my FHA loan was 10.5%. I couldn’t believe my good fortune. When compared to the 17% mortgages that had prevailed ten years earlier, this rate was a bargain!
Today, after five interest rate hikes fueled by the Federal Reserve’s desire to quell inflation, the current thirty-year mortgage is pegged at 7%- just shy of the fifty-year average of 7.76%. Coupled with the incredible rise in real estate valuations over the course of the past two years, we now face a housing environment that requires 30 percent of the average American’s wage to buy a median-priced home. That is considerably higher than the 23 percent that was required during the same time last year.
Unfortunately, it looks as if this situation is only going to grow more dire. Last week, employment numbers were released showing that the US economy had created 263,000 new jobs in the month of September. This was a bit of a decrease from the 315,000 jobs that were created in August, however, it wasn’t nearly the reduction that Wall Street was hoping for. If this sounds counter-intuitive, let me explain- As the Federal Reserve tries to control inflation, one of the metrics that they’re looking at is job growth. When the number of newly created jobs begins to diminish, the Fed will begin to realize that their policy of controlling inflation through interest rate hikes is starting to have an impact. Until then, further rate increases will be needed to cool things down. Last week’s statistic seemed to confirm everyone’s worst fear- Jerome Powell was probably going to have to raise rates another three quarters of a percentage at the next meeting of the Federal Open Market Committee (FOMC) on November 1st. When this happens, mortgage rates will rise once again and, in turn, the affordability index will grow more pronounced.
Our Local Market
The effect that these trends are having on the local and national real estate markets is one that Charles Dickens would appreciate- it’s a Tale of Two Cities or, perhaps more precisely, it’s a story in which the national market is playing out a bit differently than our local market. I’m pleased to report that, regionally, we’re the ones that are doing well.
While many parts of the country- specifically, California, Wyoming, Colorado, and Texas- are beginning to experience market corrections, our region remains fairly stable. The number of buyers is still greater than product available for them to purchase. Because sellers remain in control, it’s hard to imagine a housing correction. If you own a beautiful home, in a great neighborhood, and you’re appropriately priced, you’ll still do well. Your recent gains are mostly locked in. Sure, there are fewer buyers actively engaged in looking, however, those who are doing so are mostly those who have to buy and they’re fervent in their intent. When I look at our team’s sales for the past six weeks, it’s populated by men and women who are moving to the area for employment-related relocation OR older men and women who are downsizing into one-floor living. Their absolute need coupled with low inventory means that, although anemic, our market will probably remain stable for the foreseeable future.
Drilling down a bit, the current hot commodity is anything listed below $275,000. As the cost of borrowing money increases, buyers are having to recalibrate what it is that they’re able to purchase and, as a result, they’re looking at less expensive homes. I was fascinated to see that, of the thirteen properties that our team sold in September, nine of them were deals consummated in this price-segment. Because of the preponderance of buyers looking to purchase in this price point, bidding wars are still common. The difference between the bidding wars that are negotiated today vs. those from earlier in the year means that, instead of selling $100,000 over asking price, homes are selling $25,000 or $30,000 above list. Still, not a bad deal!
My Advice
If you’re thinking of purchasing, especially if you’re a first-time buyer, do so. At the moment, you may not be able to buy the home of your dreams, nevertheless, you have to stop lining the pockets of your landlord and, instead, put the money that you’re spending on rent into your purse or wallet. As interest rates go up in the coming months, you’ll be glad that you locked in when you did. In the coming years, if interest rates should diminish and, more likely than not, they will (17% of the US economy is tied to real estate sales. Once we’ve controlled inflation and gotten to the other side of the looming recession, the Fed will need to lower rates to encourage homeownership) you can refinance. It’s exactly the formula that I employed thirty-two years ago when I first became a homeowner and, I’m proud to say, it worked!
Where do I see all of this heading? Well, I don’t think that the coming year is going to be easy. The Federal Reserve will continue to raise interest rates when they meet next month and, more likely than not, they’ll do the same in December. Meanwhile, a “soft landing” (the Fed’s ability to tame inflation without creating a recession) looks more and more elusive. In short, the US economy seems to be careening toward a full-blown recession. The typical downturn in economic activity lasts ten months. Unfortunately, pundits are predicting that this one will be both global in nature and more pronounced. I’m not an economist so take this for what it’s worth- I’m anticipating that a stronger and more robust real estate market is probably a minimum of fifteen months away. If you have questions or concerns in regard to real estate, feel free to give me a call at 330-8750.