Should I stay or should I go?

“Should I stay or should I go?” The Clash, 1981

What should you be doing right now?  If you are or have been considering selling your home, prices have never been higher.  Even if your home is tired or has deferred maintenance, this is the time to move and sell.  Many buyers are prepared to take on a project because they have few choices since inventory is historically low.  Further constraints on the availability of new construction due to the interruption of supply chains and increased costs are further supporting resales.

Are prices going to come down?  Not likely, due to strong demographics, and the demand to live on the Gulf Coast, accelerated by COVID induced lifestyle changes.  All-time low interest rates will rise, but just enough to cool the rate of appreciation to sustainable levels. See my comments below.

Should I hold off in selling and ride the market up further?  Housing is a major driver of the economy.  The economy runs in cycles.  Home values are at an all-time high, having appreciated over 25% this past year.  The first signs of weakening appeared this month.  Pended sales were down 16.9% in July, compared to July of last year.  Closed sales were down 6.5% from July 2020.  Prices will not continue to appreciate at the current galloping pace, it is not sustainable.  It will slow down as rates begin to go up.  See my comments below.

Should I buy now and make a move?  Provided you have clear expectations of your housing needs for the next 7 to 10 years, yes, you should make the move and buy.  The psychological impact of COVID has dramatically altered the housing landscape.  It will continue to accelerate the desire to have a permanent homestead in a community like ours. Further, competition for housing will only get stronger due to US demographics.  According to the Pew Research Institute, Millennials (Born 1946 – 1996) have surpassed Baby Boomers (1946 – 1964) as the largest demographic group to date.  Millennials are entering their prime wealth building and home buying years.  This is not 2008, when subprime lending led to a bust.  Today credit standards are high, and the demographic need for housing will only grow.  These conditions are not typical of a bubble.

Baby Boomers (1946 – 1964) 71 million, Gen X (1965 – 1980) 65 million, Millennials (1981 – 1996) 72 million and Gen Z (1997 – 2012) 67 million.  These are huge demographics, and although Gen Z are young and in school, in the latter half of this decade the first group of Gen Z will enter the housing market.  Taken in totality, demographics will continue to drive an increasing need for housing well into the future.

So how do we increase inventory and taper price appreciation?  Last month I expressed these concerns:

“The Fed is buying the stock market and housing market to prop up the economy.  Housing doesn’t need it.   On this track, 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), taxpayer supported, that’s you and me, ultimately on the hook.  It does not make for good public policy and the general safety and welfare of the public”. 

For July, most metrics pegged the US inflation rate at 5.37%.  One year ago, it was 0.99%, that is a change of 444.1%.  The Fed proclaimed that the current elevated level of inflation is “transitory”.  When does transitory become permanent, how many months?  The Fed will not say.

You cannot argue solid demographics, low interest rates, working remotely, and an elevated exodus from major urban centers to places like Sarasota County. US News & World Report recently named Sarasota as the 9th best place to live.  It has created a real problem.  Our inventory, supply of homes is at all-time historic lows, creating multiple offers, homes selling over list price (which I now refer to as “opening bid price”), all in a matter of days, and leaving in its wake a dizzying array of agitated buyers.  It is not healthy.

What’s the cure?  We need to increase inventory.   An initial goal of about 2,500 units in 2022, growing to 4,000 units.  At least that is my hope.  In July there were 919 single family homes and condos for sale in Sarasota County.  That’s 0.7 months of inventory, basically 3 weeks, up from .05 months (2weeks) in June.  The first increase since February 2021.  Although one month does not make for a trend, July 2021 may be remembered as the date when the housing market began to pivot.

Heading into COVID, home sales were growing at a healthy rate.  In February 2020 there were 4,369 homes for sale; 1,658 new listings; 1,040 closings, and 1,381 pended sales — a 4.2-month supply of homes for sale.  The median sold price was $279,000, 5% higher than the median sold price of $265,000 for the prior 8 months.  Fairly solid and supportable appreciation.

Then COVID hit.  On March 16th, with the Governor’s first shutdown orders, everything came to a virtual standstill.  But it was home sales, strong leading into COVID, that led the way out.  In the span of only 6 weeks, the combined mammoth demographic of Millennials, Gen X and Baby Boomers, lured by all-time low interest rates, and COVID fostered lifestyle changes, began to compete for homes beyond the reasonable availability of product.  A perfect storm of demand overwhelming supply.

In May there were 4.6 months of inventory.  Between June and September, the median months of inventory dropped to 2.2 months.  However, the significant reduction in supply was not yet reflected in sold prices.  The median sold price between May and September 2020, increased only 3% to $287,000 from $279,000.  Buyers and sellers had not yet adjusted to current market conditions.  More particularly, there was great uncertainty as to the direction of the market and the quality of life. 

In October there was a seismic shift.  Months of inventory dropped to 1.9 months, as the median sold price shot up 10% in 30 days. Everyone in the industry experienced it, saw it, felt it.  Then within days of the Presidential election, on November 9, 2020, Pfizer announced it had a vaccine with a 95% efficacy rate.  The floodgates opened. Buyers began to offer over list price, lining up for showings, multiple offers received within days of going active.  The use of eBay-like price escalators and appraisal gap addendums became commonplace.    The desire to buy was and remains intense.  By February of this year months of inventory descended to less than one-month, today, only 3 weeks.  In July the median sold price was $375,000, an increase of 25% since the seismic shift that began in October.

Which takes me back to the cure.  How do we get to at least 2,500 homes for sale, with the goal of 4,000 homes for sale?  Some frustrated buyers will temporarily move to the sidelines.  I have experienced it in my own practice.  It will help, a little, but the big driver will be an increase in mortgage rates. It won’t take much.

As I have argued in my commentaries over the last few months, we need mortgage rates at 4 to 5%.  The yield on the 10-year Treasury, which closed Friday at 1.29%, most directly affects mortgage rates.  If, contrary to public statements by the Fed, and majority of economists, I am correct, and inflation becomes perceived as being too high for too long, and not transitory, then I am hopeful that the Fed and markets will react, and the yield on the 10-year Treasury will break 2% sometime in 2022.  If it does, mortgage interest rates should rise to the mid-4% range.

An increase in mortgage rates will be a good thing.  Don’t get nervous when you hear rates are going up.  It is the great stabilizer which will cool housing market conditions, and slow down but not stop homes from appreciating.  We have historical precedent. In 2013-2014, and 2018-2019 mortgage rates went up to 4 ½ to 5%.  It didn’t stop appreciation, but it cooled it down as months of inventory rose.   I expect that to reoccur again.  As Mark Twain said, “History doesn’t repeat itself, but it often rhymes”.

Caveat:  The widening political and cultural schism, trillions in new spending, and $28.43 trillion in debt are beyond the scope of what I can address.  Although their impact, individually and/or collectively, cannot be understated.