AN INCREASE IN MORTGAGE RATES WOULD BE A GOOD THING.

Comparing this past month to May of 2020 is not useful.  2020 was an anomaly.  However, comparing May 2021 to May 2019 is quite telling.  Last month the median sold price of single-family homes and condos rose approximately 30% from May 2019.  See tables below.

Why such a dramatic rise?  What’s going on?  Last month the number of new listings were at least par with May 2019.  In fact, there were 2.6% more new listings for single family homes in May 2021 vs May 2019, and for condos the difference between 2021 and 2019 saw a 13.1% jump. Nevertheless, the number of single-family homes and condos for sale was down about 83%.  See tables below.

The issues we face are not seller induced, but buyer produced.  New listings are at a similar pace to 2019.  But the number of buyers has grown exponentially.  When a listing comes on buyers are swarming like bees, quickly depleting the supply.  Whereas, 2 years ago homes and condos sold at roughly 92% sold to list price, today it is 98%, and within a month or so of going active.  Six months is considered a balanced market between sellers and buyers.  Two years ago, the supply of homes based on closed sales was 3 months, 4.4 months for condos.  Today, only .05-month inventory of homes for sale, .06-month for condos.  That is only 2 – 3 weeks that it takes for homes and condos to go under contract.  The speed of home sales and inflating prices are due to the huge influx of new buyers entering the market, fighting for the same relatively constant number of listings that have historically been available.  It is not a housing bubble, but it is an unhealthy market. 

Yesterday a new report by the National Association of Realtors found that there is a shortage of 5.5 million new homes, further contributing to a surge in prices.  In our own backyard, from Lakewood Ranch to Wellen Park and all places in between, builders and developers have frozen the release of lots for sale, and/or are engaged in a slow drip campaign where home sites are released in small numbers with sealed bidding wars. 

The core issue we face is that the vast undersupply of housing, both resale and new builds, is not sufficient to keep up with demand.  That demand, particularly in our Florida Gulf Coast marketplace is not going away. That demand will only continue to grow.  I have said it often, and it merits repeating here.  You cannot argue the largest demographic groups ever (Millennials and Gen X), low interest rates, and the pandemic as a driver for families to reassess where and how they want to live today, less prone to delay lifestyle changes and where to call “home”.

The answer to restore housing to a place of normality is moderately higher mortgage rates.  We are not going to change the demographics, nor where families choose to live.  But rising mortgage rates can taper the rate of appreciation, inflation.  And it doesn’t take much.  In 2018 the yield on the 10-year Treasury rose to mid to high 2% range.  Mortgage rates went up to the mid to high 4% range.  It didn’t stop home prices from appreciating, but it slowed down the rate of appreciation to around 4.5%.  That’s what we need. Are you listening Chairman Powell?

Although I wish it otherwise, it seems unlikely that the yield on the 10-year Treasury will hit 2% this year, but I am hopeful it will move up.  Today it is hovering around 1.5%, mortgage rates 3% range.  I expect it to exceed 2% next year and concurrent mortgage rates go to 4.3 – 5% range. It cooled things down in 2018, leading into 2019, and should do so again.  The pivotal word is “cool” things down, take the heat out of escalating prices.  Not stop appreciation but bring it to normality.   It is what we need to taper this hyper hot-market, and shutdown talk of a bubble.