There is a lot of factors that are impacting our real estate market. The biggest being the following: interest rates and inventory.
When Janet Yellen was the Fed chair, her inflation target was 2%. She more or less wanted the economy to grow, but at a nice steady pace. Based on the following chart from Case Shiller's National Housing Price records, I think she has succeeded.
There have been several rate hikes in order to control/manage the rate of growth in order to achieve her steady growth and recent reports tell us that we are quickly approaching a 3% inflation. Check out the following article for more information:https://www.calculatedriskblog.com/2019/01/q4-gdp-forecasts-mid-to-high-2s_25.html
The reason this is significant is how this impacts interest rates for home loans. As the fed implements rate hikes, interest rates for most loans increase including home loans, car loans, commercial loans, etc. As interest rates increase, there is more money that gets allocated to paying down the interest as opposed to paying down the principal of the loan. As a result, the price of home that an individual can afford decreases because the average monthly payment on a loan increases with increased interest rates.
Although we've seen a slight dip in home loan interest rates for the first part of the year, we are still at higher rates than we were for the prior year. This has resulted in a decrease in demand in that price point because people maybe can't afford now what they could last year.
This has been a negative impact on the market. The concern is does this mean that we are coming into another recession. My response is absolutely not. The reason being is that the overall fundamentals of the market are still really great. There's more equity in homes. Here's an unemployment chart demonstrating that we are at our lowest rates in 50 years.
Yes, increasing interest rates are tough, but people are still buying homes because it fits our lifestyle or people want to achieve stability and homeownership.
Nationwide and locally we have seen an increase in inventory and a decrease in the volume of transactions for the last quarter of 2018. That makes a number of people nervous myself included. However, there are several contributing factors to that. Again, increased interest rates at the end of last year make it more difficult for buyers to afford a home. This is also known as reduced purchasing power. Second, it's the holidays and few people move over the holidays. Third, in most situations, we have reached or surpassed pre-recession highs. That is psychologically challenging for a lot of buyers especially when this is compounded with higher interest rates and reduced purchasing power. Fourth, it takes time for sellers to see and or appreciate the impact of all of these factors on the market and what that does for the purpose of selling your home.
Again, this doesn't negate that we have good fundamentals in our real estate market overall. We just need to be aware that these factors impact the speed at which our properties will sell. Days on market increases slightly. Buyers have more to choose from as inventory turns over at a slower rate. As a great example, we've seen a lot of movement in our income property market. Most investors have seen the slight slow down in the market and have aggressively come out and negotiated to target lower property taxes. By waiting for a slight correction and being aggressive, investors can control one of their most significant ongoing costs: property taxes.
We've been growing at roughly 6-7% year over year, but with increasing inventory and interest rates, we will likely see that rate of growth slow down. If I had to compare it to something, I'd say it's a little bit like pulling your foot off the gas when driving a car. It's not to say that we aren't still moving forward, we just aren't accelerating. We will likely see fewer developers and small scale flippers because aggressive market appreciation is more or less their safety net. They purchase a property based on comparable properties at the time of purchase, but become significantly more profitable when that same property has increased by 6-7% more than the comparable property at time of purchase.
The overall takeaway: the market is still healthy, just be patient and responsive.