Soft Landing for Real Estate or Market Crash?
Real estate prices, like all goods for sale, are a function of supply and demand. However, the government and the Fed does try to insert themselves from time to time to manipulate that equation, whether it be from terms like rent control or even manipulating interest rates like the Fed is doing right now. If you're looking to buy or sell a house in Huntsville, AL, predicting what the real estate market is going to do can help you time the market to your benefit.
Lack of Housing Supply
Supply in this country is down 6.5 million homes nationally, which is why you see prices increasing over the last couple of years. Pricing is simply a matter of supply and demand, what the Fed decided to do is instead of going after the supply challenge in this country, they went after the demand side of the equation.
They started raising interest rates. Rates were in the 2’s and 3’s and they increased them as high as into the 7% range, which is why we've seen a demand decrease of over 32% both locally and nationally. The demand side of the equation has been fixed at least temporarily, with a 32% lower demand. However, the big challenge is that supply has decreased by 27% as well.
Some of that is this mortgage rate lockdown effect where a lot of would-be sellers are sitting on the sideline with rates in the 2’s or 3’s and are simply not motivated enough to sell their home in this marketplace. The other side of the supply equation is new construction. The biggest concern there is a lot of builders are deciding to sit out or decrease their production, which is going to be a big challenge as demand increases again with lower interest rates. We may simply not have enough supply once again when that happens.
What does the Fed do next?
The Fed is now faced with the question, what do they do next? I think they've got three different options.
1) They can continue doing what they have been doing by increasing interest rates. I think that poses two challenges. I think under that scenario you have more and more people renting versus buying which will push us further towards that “Renter Nation” type status. The reason for that is as we have higher interest rates, fewer people will be able to afford a home which would cause more investors to purchase in this market.
The second thing and I think this is the biggest challenge for the nation if we continue to raise rates, I think that moves us closer to a currency collapse as we simply can't afford the debt load and the interest rates that we're having to charge ourselves on the debt that we have borrowed.
2) They could pivot and start to decrease rates. Depending on who you talk to, we're heading into a recession or we're already in recession. What they could do is start to decrease rates and increase the demand. The challenge is that they've also decreased the supply already in this country and the supply was already a 5.5 million home deficit. If we do that too quickly, we're likely to experience what we've seen over the last couple of years with double-digit price appreciation again.
3) We could keep rates flat. The theory here is that we're kicking the supply challenge down the road and that builders would magically produce enough homes in the future to match that supply and demand imbalance that we currently have.
This could create the soft landing that everybody is hoping for as rates start to flatten out. That would also start to decrease 30-year and 15-year mortgage rates. What we've seen historically, at least last year as rates hit the 5.5% mark, we still saw a lot of buyers in the marketplace and a very strong seller's market.
Based on our own polls, the people that are planning on buying a home this year, most people said they would reenter the marketplace at 4.5%. As we see 4.5% interest rates, expect to see a very strong seller's market once again, which is also historically the average interest rate that we've had in this country over the last 20 years.
I predict that we will see a relatively soft landing as interest rates start to flatten out in 2023. I think that period will be somewhere between 12 to 24 months. Expect to see strong price appreciation and occur again once interest rates decrease to that 5.5% to 4.5% range, expect to see double-digit appreciation both locally and nationally for homes.Matt Curtis on