Interest Rates Hikes, Bank Failures, & Huntsville Housing Market Report

For the February Huntsville Housing Market update, we are going to cover everything from average sales prices and inventory to interest rate hikes, bank failures, and the safest places to put your money. With an insight into how the market is currently operating, we'll also discuss what the Fed is doing and what the future holds. If you are buying or selling a home in Huntsville, Alabama, this information can help you make the best decision when it comes to your financial and real estate goals.

Average Sales Price & Homes Sold in Huntsville

Average sales prices have gone up in the Huntsville area by 5% year over year from $356,000 to $374,000 for your average home in Huntsville.

The actual volume of homes being sold has gone down year over year by 21% from 574 homes to 452. That has to do with the mortgage rate lockdown effect. A lot of sellers had that interest rate starting in the 2’s or 3’s and are simply not wanting to sell their home right now. And with higher interest rates, that is also locking out a lot of would-be first-time homebuyers from purchasing their first home. Home sales are down 21%, but so is inventory as well.

Housing Inventory in Huntsville

Inventory is starting to creep up. We're at 1,405 homes versus 511 last year in February 2022. If you look at the chart nationally, we're still well below historical averages. We're nowhere close to where we need to be so that it’s considered a balanced or healthy market. Most economists are predicting we're anywhere between about a 2 million to a 5.5 million home deficit nationally.

We were starting to decrease that deficit with new construction beginning to ramp up but they have slowed down with interest rate hikes. The challenge is we're not building enough homes to create a dent in that 2 to 5.5 million home deficit. In the best case scenario, if builders start to get ramped back up, we're looking at least five years, probably ten years or longer before we can make a significant dent in this housing shortage that we have and get to more of an equal balance between supply and demand.

Supply is up, we were still at historically low numbers. We had about a month's supply about a year ago but now we're up to 2.4 months' worth of supply. We're headed in the right direction. The biggest challenge is the typical supply of a balanced market is 4 to 6 months, we're still well below that 4 month range at 2.4 months, and that's with demand being taken away with higher interest rates.

The question is, once interest rates go back down, what does that do to demand? Likely, that's going to make demand skyrocket again as more people can afford homes. Since we're only at 2.4 months with the higher interest rates, we're still not in that balanced, healthy market we really need to be in. We're in a seller's market, but potentially an extreme seller's market if interest rates start to come back down due to these bank failures that we've seen.

Housing Affordability in Huntsville

Prices are up 5% and interest rates have doubled over the last year, so what has that done to affordability? Keep in mind, a housing affordability score of 100 means the median income in our area can afford the median price home in our area. A score of 100 is ideal and anything above 100 is a good thing.

Unfortunately for single-family homes, we have dropped below that score of 100. We've dropped 22.8% year over year, we’re down from 123 to 95 for single-family homes. For townhomes, we are above 100, but we have dropped year over year from 174 to 116. Expect to probably see more townhouses, more condos, and more multifamily development over the next couple of years as we have affordability in that prices for more buyers to be able to afford these types of homes.

The Fed Hikes Interest Rates in 2023

One of the things that are affecting affordability has been higher interest rates. The Fed did recently announce that they are raising interest rates another quarter of a point, but it looks like there may be an end in sight. They are stating that there may only be one additional rate hike this year. The question is, how is that going to relate to mortgage rates?

Potentially in a good way since a lot of the interest rate increases on the 30-year mortgage have been priced in this fear and unknown of what the Fed is going to do. Now that they know that there's only going to be one more rate hike, you may see a little bit of easing in 30-year rates. Also, the ten-year Treasury bond has been down as of late as well, so that could cause 30-year rates to go down over the short term as well.

Bank Failures in 2023 & Why They’re Happening

All these rate increases have started to create pressure on the banking system. What's happened is there's been a couple of banks that have collapsed and there's fear that other banks could collapse as well. The reason for that is as you open up a deposit account and they pay you interest of 1%, 2%, 3%, they've got to go out and put your money to work to be able to pay you the interest rate. They loan out money to other people or a common thing is buying Treasury bonds, which are considered some of the safest investments on the planet. The challenge, in this case, as they were buying ten-year Treasury bonds; the interest rates were increasing on that. So interest rates may have been 2% when they first bought them, then they were needing to pull that money out because people were doing cash calls and wanting to withdraw their money from the bank.

When interest rates are 4%, how do you sell a bond from the government that's only paying 2% when you can go down the street and get 4%? Well, you have to decrease the value of that bond and sell it at a loss, which is what created the risk in the banking system. Now there's a risk of other banks suffering a similar fate as well. That's what's going on in the banking system right now.

The other thing that's potentially going to happen and may cause an even greater effect than interest rate hikes by the Fed, is the tightening of these banks. A lot of banks don't want to go under and have the same faith that these other banks had, so the tightening of the credit market could actually cause greater effects and greater effects towards a recession than even what the Fed is doing as well.

Safest Assets to Invest Your Money In

With the Fed continuing to raise rates and banks beginning to fail, where is the safest place to put your money?

A lot of people say banks are insured up to $250,000, above that your money may be at risk. Below that, it's still up to whether or not the FDIC has the money to bail that bank out and make good on that. So a lot of people consider a small local bank not as safe as maybe a regional bank or a national bank in times like these. More likely, a national bank might get bailed out before a small local bank so that's one thing to consider.

On top of that, in terms of the safety of money, probably a Treasury bill. The debt of this country is likely safer than the banks is what a lot of people believe and consider, which makes sense. If a bank fails, is the Fed more likely to pay off its debt or for the bank failure? Probably their debt first. Quite frankly, as we've seen in these bank failures, if they're not paying on their debt then banks are likely to fail as well.

Probably the safest place to put your money is hard assets. That would be things like crude oil but nobody has a place to put crude oil in their home. So precious metals, gold and silver, and real estate. Real estate is up 5% and the awesome thing about real estate is you do that on leverage. If you're putting 10% down on a home, it's not 5% appreciation. You're actually leveraged ten X and so a 5% appreciation on a 10% down payment is actually a 50% return on investment on your money because you’re getting appreciation on the entire value of the house, not just your down payment. 

Real estate is one of the safest places to put your money in times like this. If you're looking to buy or sell a home during these times, send us an email at moving@mattcurtisrealestate.com or contact us here.

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