The Fed is buying the stock market and housing market to prop up the economy. Housing doesn’t need it. On this tract, home values will continue to appreciate at unhealthy levels. You may ask, “Why is this a bad thing, my home’s value is going up”? Because it will get to the point where the American Dream of home ownership will only be available to an ever diminishing few. There will be lateral moves, downward moves, but limited aspirational moves, and a closed door to first-time homebuyers and affordable housing, already in difficult straights. It will spawn greater government intervention in housing, which is too heavy already with government sponsored enterprises (FNMA & Freddie Mac). It does not make for good public policy and the general safety and welfare of the public.
In my January 11, 2021, commentary I highlighted the macro issues I would be monitoring to gauge home sales trends in Sarasota County. Half-way through the year, here’s where we’re at, what I postulated and what I foresee:
- The Federal Reserve & Inflation. Pre-pandemic the rate of inflation was 2.3%. At the end of 2020, it was 1.2%. The Fed “had” spoken with firmness that it would likely not raise rates nor curb its asset purchases until 2024. To ensure no slide back to a recession, prior to raising rates or trimming back its asset purchases it wanted to see inflation hover around 2.5% for an extended term. In June, the Fed raised its expectations for inflation from 2.5% to 3.4%. Many metrics now peg the inflation rate at 5 – 7%. Citing higher inflationary pressures as “transitory”, an anomaly of the lockdown recovery, the Fed reported that it expected inflation to normalize as we near the 4th-quarter. It did not change its guidance. It continues its asset purchases and is maintaining short-term borrowing rates near zero. But not all members of the 18 member Federal Open Market Committee agree. 13 members forecast that the Fed will advance the timeline for raising rates in 2023, while 7 members anticipate rates rising as early as 2022.
- Interest rates. In January I said mortgage interest rates would rise from the then current 2% range to 3-5% range; that the test for the Fed will come when the post-pandemic boom arrives, and signs of financial excess appear with inflation and asset prices moving higher. Customarily the yield on the 10-year Treasury has a direct impact on mortgage interest rates. At year end the yield was 0.9%, under 1%. Mortgage rates were at historic lows, in the low to mid 2% range. As inflationary concerns grew, within a few months the yield rose to 1.65% range, driving mortgage interest rates to low 3%. Over the past month The Fed’s “transitory” guidance has cooled inflationary concerns, driving equities (stock market) ever higher and interest rates lower. Today the yield opened at 1.37%, the 30-year mortgage lower at 2.9%.
- Unemployment. In January I forecast that unemployment would remain high until the surge in the virus subsides and the vaccine is widely distributed. The vaccine has been widely distributed and the most recent jobs report finds that the unemployment rate in Sarasota County has dropped to 4.10%. At the onslaught of the pandemic, April 2020, the unemployment rate rose 10% to 14.70%.
- Forbearance and Eviction Programs. Upon the advent of COVID there were over 5 million home loans in forbearance in the US. Concern was elevated that when these homes come out of forbearance they would flood the market, increasing inventory and reducing prices. Although, reducing prices or at least the hyper-rate of appreciation would be a good thing. However, today there are less than 2 million homes in forbearance, many of which have increased in value, providing additional equity to satisfy indebtedness of homeowner borrowers to lenders. Consequently, I believe the end of the forbearance and eviction moratoriums will have a deminimus effect upon inventory, and accordingly, unlikely to materially slow the over-heated rate of appreciation.
I have said before that you can’t argue demographics, low interest rates and the desirability to live in our glorious Gulf Coast. It only makes sense that with strong fundamentals, home prices would be hotter than normal. But prices are rising too fast because we have insufficient inventory to meet demand. And an improving employment market will continue to sustain demand. Some homes will come to market as forbearance and eviction moratoriums end, but for reasons cited above, not enough to make a serious dent in the under-supply of homes for sale. Further compounded, in our market builders and developers are releasing lots and new homes in limited numbers and often to competitive bidding, advancing restricted inventory, pushing more buyers to resales with ever elevating prices. Credit … there’s been no growth in credit, lending standards have not lessened, another contributing factor to the rising cost of home sales.
Last month there were 954 new listings. Although that is 9.4% more than 2 years ago this time, it is not close to meeting demand, where there were 1,190 closings and 969 pending sales, leaving only 571 homes for sale, 81.2% less than the same time 2 years ago, a paltry 0.6-month supply of homes for sale, essentially 2 weeks. I am referencing 2 years ago, because that was pre-COVID, a stable market appreciating at historical standards.
Condominiums? Same thing. 260 new listings in June 2021, 10.6% more than June 2019. But there were 75% more closed sales, 398 to be exact, and 270 pending sales, 21% more than 2 years ago. It left only 225 condos for sale in Sarasota County. As with single family homes, 81.7% less condos for sale than June 2019, an identical 0.6-month supply.
An environment of high demand, strong demographics, growing economy, increasing job market, firm credit standards and historically low interest rates with a low supply of homes for sale does not create a housing bubble. What it creates is an environment where prices are too hot. As I have postulated in prior commentaries, only an interest rate increase will cool the rate of appreciation. Not stop appreciation but cool it to sustainable levels. It did so in 2013- 2014 and 2018 -2019 and it should do so again. It is why I have argued that the Fed should begin to dramatically slow down its purchase of mortgage bonds. Housing does not need the support. The fundamentals as set forth above are strong on their own. We need to see the yield on the 10-year Treasury grow to 2-3%. It is arguably the only thing we can control.