We are fully immersed in buying season. It’s typically a busy and thus happy time of year for homebuyers and sellers. The sun is shining and boxes are being packed, because folks are moving. They are moving because they bought or sold a home. They are one step closer to building a real estate empire and living the American Dream. Ahh. It is such a nice time of year.
The 2024 Buying Season
Is that how you’re feeling right now? Speaking only from my teams’ experience, it has been incredibly busy. We continue to see an increase in applications each week and every weekend we send out a lot of preapproval letters. We’ve noticed our borrowers are both more serious and more active.
Inventory is still a problem though.
There just is not enough. The week ending April 20th (two weeks ago) was the most new listings we’ve seen in Northern Nevada in a single week in over a year. Last week we saw 115 homes hit the market and 126 go pending. So it makes sense that last weekend, we ran into a lot of bidding wars and the new listings went pending very, very quickly. When we compare this to previous weeks this year, it is a slight uptick. But, when we compare to previous years…it is less. Even with higher interest rates, it isn’t enough to feed the demand of buyers out there trying to lock down a home.
And we know why. Or at least we thought we did. Builders have been underbuilding since the great recession, so we have a supply and demand problem as Millennials reach homebuying age and flood the market. The golden handcuffs of previously low interest rates are trapping people in their homes that no longer fit their needs. They cannot move up or down because the monthly payment on the house they hate is too low. We’ve analyzed all of this, at nauseum.
On Property Pursuits this week, Lee Stevens brought up a new perspective that his team of 30 realtors here in the Northern Nevada market has started running into. When they go to listing appointments, they’ve found that some sellers are trapped by their debt.
Backed by Gold.
Are homeowners funding inflation? It’s only logical we point the finger at them next. We’ve already tried to blame everyone else, including Boomers. I started thinking that maybe that low housing expense of homeowner’s who have a 2 or 3 % interest rate is giving them false confidence to spend. To be fair, the confidence is only partially unfounded. They do have better cash flow because less money has to be spent on their place to live so they have more funds to pump into the economy – shopping, vacationing, and dining.
On the other hand, they are dipping into more debt to fuel that spending. Homeowners carry more debt on average than renters. This is kind of layered. Homeowners have higher credit scores, in part due to the fact that they demonstrate they can make payments consistently on a mortgage. This better credit rating leads to higher limits on credit cards. So while their utilization of debt is lower than renters – homeowners are using about 23% of their available credit versus renters who are using 30% - the amount of debt is still higher.
Lee shared with us that this is more than credit cards though. Homeowners are using their equity (the gold in this analogy) to fund their spending habits. He’s had three listing appointments in the past few weeks where once they reviewed the debt attached to the home between the first mortgage and the HELOC they took out later – they do not have the equity they need to be able to move up or down. There’s not enough proceeds for a down payment. Which is wild when you consider the way homes have appreciated over the past few years, we are talking about 20-25% year over year appreciation in a lot of this scenarios – up until last year where appreciation slowed to about 3-4% depending on where you are. Still, that’s a lot of appreciation to have spent but inflation has been hot. We know that all too well and so does the Fed.
Fed Meeting
Wednesday was feared to be one of the biggest market moving Fed Days in recent history. While we all knew a rate cut was off the table, some were actually nervous about a rate hike given the recent inflation readings. The more savvy economists were watching for commentary on how the Fed would manage their balance sheet.
Many people think that the Fed controls interest rates using only the Fed Funds rate. The Fed Funds rate is not the equivalent of mortgage rates. Mortgage interest rates are actually driven by the supply and demand of mortgage bonds. As part of the Fed’s stimulation of the economy over the past…. oh decade or more….they’ve built a heavy balance sheet of bonds and have been off loading them. The oversupply of bonds in the market drives interest rates up. Many were scouring the meeting minutes to find out if there would be any changes on that.
We got some good news.
They will slow the reduction of treasury bonds on their balance sheet from $60 billion to $25 billion, reinvesting $35 billion monthly starting in July. No change to the roll of mortgage-backed securities and their next move will not be a hike. They feel they have been restrictive enough to eventually cool inflation. This sparked tears of joy amidst lenders because it bodes well for rates but with inventory this tight – it’s going to lead to some tears amongst buyers.
Jobs Report
Queue more tears. The market was expecting 243k jobs to be added and I was just praying for it to not be 300k. Well, in a beautiful stroke of fate and complete change of pace, we got a friendly jobs report. There’s this ironic space we live in where bad news is good news – a report showing only 175,000 jobs added indicates some contraction in the economy. Big picture that’s kind of a sad thing but it’s amazing news for mortgage rates because it shows the Fed’s measures to slow economic growth as a means of taming inflation are working. If those measures are working, then those measures can at some point stop – meaning interest rate cuts.
Now I don’t feel like a terrible person celebrating bad news for the economy for three reasons:
I do not think these blockbuster jobs numbers have been indicative of what people are actually feeling in the job market. So it is nice to see some data that seems to reflect reality.
Along those same lines, conversations on Main Street have not been about how strong the economy is and how wealthy people feel. Most have been talking about how pinched or at least nervous they feel.
I am here for affordability. I don’t think our path to affordable housing includes the prices of homes dropping because of the inventory problems. That means we need interest rates to come down.
Which brings me back to the tears. Will this week’s news and the subsequent improvement in interest rates lead to happy tears or sad tears? Will buyers reap the rewards of a better monthly payment and improved buying power or be squashed by their competition returning to the market and driving up bidding wars. We shall see my friends, we shall see…