Why Isn't the Housing Market Behaving the Way We Thought It Should?

If you are like most, time is limited – and to get our daily news we peek at headlines on our phones or devises.  If there is time between heading out the door, heading back in the door, work, working on getting back out the door, working to get ready for vacation, working while on vacation, and working on working on getting back from vacation – we have just a wee bit of time to jump into an article to get a brief peak at a specific topic.  In this day and age then, the headlines become the actual story for us.

AND, if you are like me, then I know unequivocally, the focus and your favorite topic to read about are the meeting minutes from the federal reserve, diving into the ebb and flow of the mortgage-backed securities market – and applying these trends into a formulation of how a post Covid economy battles inflation inside of this so called pending recession (will the sky ever fall?) that has been talked about for the last 18 months. Wait, you aren’t like me? That’s ok, my wife even agrees, it’s a good thing that most people aren’t.

So, how exactly do we collectively think the housing market should be behaving?  When we see headlines like “The Federal Reserve is raising interest rates… AGAIN” or “Mortgage Rates are at the highest point since 2002” (for perspective, on this date in 2002, “Don’t Let Me Get Me” by P!NK was #1 in the charts  – let’s sing it together… “never win first place, I don’t support the team, I can’t take direction, and my socks are never clean…”) our natural thought is that higher interest rates should bring housing prices down.  Lower prices mean desperate sellers, desperate sellers mean a desperate unhealthy housing market. 

Heck, at best – Freddie Mac – a federal mortgage agency predicted that we see a pricing correction of about a 6% decline in 2023.  National economists, and forecasters (including myself) put together models thinking that nationally we’d see 2023 pricing relief somewhere between 6-12%.  So, why the heck, has that not happened yet? 

There are 3 primary reasons:

#1: Mortgage rates are at their highest point since P!NK topped the chartsIn the grand scheme of things, 2002 wasn’t that long ago.  According to Realtor.com, while many first-time home buyers and upgraders are choosing to sit on the sidelines, Investment buyers are at an all-time high.  As in, the history of ever – going back to the time that the woolly mammoth was walking through Madras - we are at that kind of an all-time high.  31.1% (nearly one of every three) homes in America is being bought as an investment property. 

Question: So, what do Investment buyers have that we don’t? Rates are high aren’t they?

Answer: Perspective.  The average age of an investment homebuyer is 59 years old.  They were buying their first home in the early 1980’s, back when “Coward of the County” by Kenny Rogers was #1 on the charts.  (Yes, Kenny did have some #1 hits!).  In October of 1981, interest rates peaked at their all-time high of 18.625%.  Rates today, are less than half of that.  If you are in your late twenties to late thirties, really your only reference point is seeing mortgage rates more or less fall each year of your adulthood. This is the first time we’ve seen then bounce the other way.

#2:  The Supply and Demand Curve for the Housing Market is HealthyPull away the interest rate conversation, and simply look at the number of buyers and sellers in the market.  The National Association of Realtors has said that a market is ‘normal’ when it has a 6-month supply of homes; as that is one where neither the buyer nor the seller has an advantage in negotiations. (This means, if another house didn’t enter the market, it would take 6 months for all the homes to be sold, based on the current number of buyers and sellers out there).  In June, according to the Portland Metro RMLS – there was only 2 months of inventory; signaling that if an agreement isn’t reached in negotiation, the seller can likely expect another buyer – and their house will sell on the quicker side.

Question:  But aren’t there less people selling their homes?

Answer:  Yes.

Follow up Question: Well, then, why aren’t prices dropping?

Answer:  Because less people are selling their homes.  ????  Let me explain.  Just because there is less inventory (the supply side), it doesn’t automatically mean lower housing prices.  This is because of the demand side of things. With Portland being a growing city (in 2022, nearly 20% of all home sales were buying people moving TO the Portland metro), a high number of investors buying single family homes in Portland’s suburban areas, and with the expected amount of ‘normal’ buyers in the marketplace – there is demand against the supply.  Anecdotally, on the mortgage side of things, I’m seeing my buyers in multiple bid situations.  If you were selling, and you got multiple bids on your house, would you think it was time to drop price?  Probably not.

#3: Rent and wages.  According to Zumper.com, the average rent for a 4-bedroom house in Portland is $3200 a month.  Kinda sounds like a mortgage payment, doesn’t it?  Folks are choosing to buy what in the longer term has proven to be a long-term appreciable asset instead of paying rent to someone who listens to “You have to know when to hold ‘em,  know when to fold ‘em” on cassette tape (that is another Kenny Rogers reference for you millennials out there.  ????)

According to ZipRecruiter.com the average fulltime salary in Portland is just shy of $70,000 a year.  As a married couple – that is $140,000 income – which is $11,666 in monthly gross income.  In most cases, that income will get a buyer to get to the land of being pre-approved for at least a $4,000 a month mortgage payment.

Conclusion: I’ll conclude this article with a quote that I love – and many ‘old timer’ investors still follow.  “Be greedy when others are fearful and be fearful when others are greedy” – Warren Buffet.

It’s up to you to decide where this market is and currently headed (I have my opinions and will share them in a future article) and then act appropriately.  The Federal Reserve has signaled this week that they will likely continue to increase the overnight lending rate.  So far, that has had little to no impact on housing prices – but as you know it has correlated to higher mortgage rates.  Is it time to buy or sell, or is it time to sit tight?  The answer is going to be different for everyone, so there is not a blanket “yes” or “no” answer.   Let’s talk, or connect with a Real Estate agent and ask for their trusted forecast of market conditions.

Thanks for reading, and Disclaimer:

My predictions are my own and based on individual research and don’t reflect that of C2 Financial Corporation. If there are 36 super computers predicting the weather, just imagine how many there are used to predict economic conditions! And still, they aren’t always right! Do not use this article as a basis to make financial decisions in your investment portfolio. Only do so with the guidance and advice of a licensed Financial Advisor.

* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.

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