Housing Supply, Housing Demand and “The Corona”

The biggest unknown in any economic model is how we the consumers will act, and this rings true for Charlotte real estate as well. I had someone tell me that the “bottom fell out” of our real estate market and I had to take a step back to regroup before responding.

What market indicators were they looking at? Well, it turns out that they were looking at the economic indicator that reigns supreme above all others… their own gut feeling. No one feels comfy making large decisions in the midst of a global pandemic and yes, based on the Charlotte Region Weekly Market Activity Report from our local Realtor® association there have been some slowdowns. However, these slowdowns aren’t necessarily what you might think.

Pre-Corona Armageddon 2020 there was no disputing that the Charlotte real estate market is highly sought-after. There are tons of people moving here for all different reasons each and every day, and we have a booming economy and our job market is top-notch for people in professional industries. There’s so much opportunity here that we have to bring in job applicants from other cities and states because prior to the pandemic we had extremely low unemployment numbers for those working in traditional desk jobs. (No, the same cannot be said for those working in trades, customer service and labor positions, but the affordable housing crisis is a blog post for another day.)

Our biggest issue within Charlotte’s real estate market is and has been a supply problem. We have tons of qualified people and not enough housing to ensure that even the majority of buyers can find a suitable home. This in-turn drives up the prices for the homes that are available and creates the chaos and bidding wars we’ve seen for the last few years.

The changes that have been felt in our market are honestly, more of the same old story: too many buyers and not enough houses. Based on the Weekly Market Activity data the market is slowing down from the perspective of less homes are being listed for sale. So, in an already jammed up market people who would sell are afraid to sell. However, those that do venture into listing are being rewarded by receiving a higher percentage of their listing price at closing and their home being on the market an average of 38 days, that’s 19.1% LESS time than last year when the average days on market was 47 days.

If you’re looking to sell just remember: To the victor goes the spoils.  Get out there and get listed. If you’re a buyer waiting for the true “bottom” to fall out, it appears that you’ll be waiting a little longer than what a globally-debilitating economic crisis can offer up to impact our Charlotte slice of heaven.

What could a year REALLY cost you?

Waiting a year for a lease to end or a promotion to be awarded can sound like a great thing when looking to buy your first home, but with  mortgage interest rates expecting to trend upward over the coming year, a small percentage increase could mean big money over the life of your loan.

When I talk about 1% interest it sounds tiny, but what if I told you that amounts to an additional 50,000 you’ll be paying to your lender if you’re gearing up to purchase a median priced home in Charlotte?

Now it sounds serious!

So here’s the scenario:

According to the Charlotte Regional Realtors Association, the median price of a home sold in Mecklenburg County was $250,000 during October 2018. Currently, mortgage interest rates are hovering around 5%, with increases expected in the next year. Based on these statistics and with the help of MortgageCalculator.org, here’s the math for what that actually means for someone buying a house today, and a the same house a year from now (of course I’m not taking into account price inflation… that’s a discussion for another post)

Here’s the math:

Today vs 1 Year

** This analysis is brought to you by MortgageCalculator.org and my super-sweet Microsoft Excel skills**

Assumptions: again, I assumed that the price of the home was the median price for Charlotte of 250k, and that the loan is a conventional, conforming loan (aka 3% down with PMI until the borrow has 20% equity in the home, at which point PMI goes away). I estimated property taxes, which were a bit high as compared to what I saw on recent sales in the MLS, but we’d rather be a bit conservative, right? Homeowners insurance for this example was a downright guess and is dependent on each home/homeowner/insurance company/etc.

What this means for you (even if you don’t like math): With all things being equal, a 1% increase in your mortgage interest rate could cause you to pay $152 more each month for the SAME HOUSE. And this $152 a month causes you to pay PMI for a longer period of time (because it takes longer to get to the required 20% equity in the home). On a yearly basis you’re paying an additional $1,825 for the SAME HOUSE. Over the entire 30 year life of your loan, this means you’re paying an additional $55,973 to your lender… why? because of a measly 1% increase in your mortgage rate.

 

Fed rate, T-bills and Mortgage rates… Oh My!!!

Around every water cooler in America we’ve all been discussing that the Federal Reserve has been steadily increasing rates from the historic lows we’ve seen for the past 10 years, and is currently hovering between 2 and 2.5% as of the writing of this post.

But what is the Federal Funds rate? (and honestly, why do I care?)

The Federal Funds Rate is the interest rate that banks extend short-term, overnight loans to eachother so that they meet minimum bank reserve requirements. As the Fed increases rates, banks must keep more funds on-hand at the bank or they must elect to pay more to borrow from another institution to meet these requirements. So, banks have to hold tighter to the money that they have. From a 10,000 foot perspective this restricts the overall availability of cash within the US economy and slows investment. This causes business to grow and hire workers more conservatively and keeps the US economy as a whole operating at a sustainable level. When the US economy weakens (i.e. high unemployment numbers, etc.) this process is reversed and Fed rates are decreased.

While the Fed rate does not have an immediate impact on things like mortgage interest rates, it does have an overarching impact on the economy, consumer and investor confidence, and investment decisions made based on the consumers’ and investors’ level of confidence.

A better indicator of mortgage rate changes is the treasury bill (T-bill rate) as investors compare all fixed-income investments against one another. In this comparison, T-bills are fixed income investments that are backed by the US government, meaning that their risk is very low, therefore, to be deemed as attractive to investors other fixed-income investments must offer a higher rate of return to counter-balance the additional risk that the investor must take on with things like mortgage-backed securities. Instead of being guaranteed by the US government these investments are supported by the value of the consumer home loans they contain. Relying on consumers to pay their mortgages and associated interest payments carries significantly more risk to an investor than the US government. Therefore, as treasury rates of return increase, the returns available to investors in mortgage-backed securities must also increase (i.e. mortgage interest paid by the consumer), otherwise these investors would switch into the less-risky government bonds.

While the Fed rate does not have a direct impact on mortgage rates for consumers, overall, an increase in the Fed rate and treasury bill rates of return cause pressure on consumer mortgage rates to keep the balance of risk and reward in the investment arena. So, without any signs of decreasing Fed rates, expect mortgage rates to continue to climb over the foreseeable future.