How is it that median sold prices seem to be holding, not going down? The short answer is that the supply of homes for sale, although increasing due to more buyers marginalized from higher interest rates, is still not able to keep pace with demand.
Sold prices are a 2-month lagging indicator, reflecting contracts signed 2-months prior thereto. In July, as interest rates went over 5 ½%, days on the market grew, the sold/final list price ratio went down, and the median sold price for existing single family homes hovered in the $500,000 range. In September and early October, mortgage rates went over 6%, testing 7% levels. The median sold price dropped to $480,000 in November.
For over 1 ½ years, I have argued:
- That interest rates are too low, causing homes to appreciate at unhealthy levels.
- That the Federal Reserve needed to increase the Federal Funds Rate.
- That inflation was not transitory.
- That the only thing that would slow the unhealthy rate of home price appreciation was higher rates.
When rates go above 5 ½%, prices plateau. Over 6% to 7% range, prices moderate from downward pressure. However, following 45% appreciation over the past 2 years, most homeowners would easily absorb a 10% adjustment.
Prices are not going to go materially lower. The demographic demand in Sarasota County is simply too great. And an all but certain near-term recession, while painful, will signal to long-term investors that inflation is getting crushed. It will simultaneously drive mortgage rates down to the 5% range, bringing sidelined buyers back to the housing market. Prices will press forward again, albeit at a supportable high single digit rate of appreciation.
Watch the job market. Currently, unemployment is at 3.7%. Once it hits 4.5%, we will be in the full throes of a recession (a 2023 story). Wall Street will concede the Fed is winning the battle against inflation. The yield on the 10-year Treasury will go down, and with it mortgage rates, approaching 5% levels. Home prices will steadily climb. The housing recession will be the first sector to free itself of its shackles.
Note: A historical comment. Unlike the stock market, shelter is amongst the 5 essential human needs (food, water, clothing, sleep, and shelter). Shelter is 43% of the Consumer Price Index (“CPI”). Land is finite, unlike a mass produced commodity. Accordingly, the rate of home price appreciation should be higher than the rate of inflation.
Since 1980, home prices have weathered the five recessions quite well. Nationally, home prices grew 6.6% during the 2021 Dot.Com recession. During the 1980 and 1981 recessions, prices grew 6.1%, and 3.5%. Only twice did home prices recede: a scant 1.9% drop in 1991; and a massive 20% drop during the Great Recession (in Sarasota 40% drop), caused by lax mortgage standards.