Can Home Prices and Interest Rates Soar at the Same Time? ---- Maybe Not......

davfor

It had been my expectation that affordability issues would cause demand for available houses to drop once mortgage rates reached about 4% to 4 1/2%. This article suggests that a variety factors unique to this rate increase cycle may mean that will not happen anytime soon. That would be good news for our economy.

Rising mortgage rates are supposed to cool house prices. But this time could be different.

Interest Rates Soar

davfor

But, there is one area where the supply/demand balance appears to be shifting....

Soaring Mortgage Rates in U.S. Dent Demand for Vacation Homes

davfor

The Fed may be getting its way now that mortgage rates are in the 5% to 6% range. That impression corresponds with what I am seeing in small town NW Oregon.

The housing market just slid into a full-blown correction, says top economist Mark Zandi

Junkster

Home prices in vacation areas in the mountains of western NC, more specifically Seven Devils, Banner Elk, and especially Beech Mountain have literally doubled/tripled since 2019. $300,000 homes now routinely go for $600,0000 and more. There is a 2500 sq ft home in Seven Devils that sold for $265,000 in 2013 that is now listed for $849,000.

The driver behind these crazy prices is renting out these homes. Younger couples buy these homes as eventual retirement homes but in the meantime are renting them out for short term stays. They are netting $50,000/$60,000 annually. Skiing in the winter and temps that rarely reach 80 in the summers keep these homes in high demand throughout the year as rentals. Inventory of homes reached lows of under 10 in some area but now is finally building to over 40. albeit still low historically. Except for Seven Devils where inventory is but a few homes. Prices though haven’t dropped at all in these mountain getaways,

Another driver that I don’t see mentioned much are record stock market prices in 2019 through 2021. Everyone is now rich and paying cash for these vacation homes - or so my realtor friends there tell me. If the market zooms back up from here I don’t see much lessening of demand/prices regardless of interest rates.

Old_Joe

Here in Northern California several counties (Marin and Sonoma, to name two) have recently enacted moratoriums on short-term vacation rentals because the prevailing political wisdom is that short term rentals remove potential rental properties from the full-time rental market, thus contributing to the well-documented housing shortage.

Our Russian River home is located in Sonoma County, and for well over twenty years the house next to ours has been occupied by full-time renters. If it were removed from the full-time market that would indeed be one less house available for such renters.

It's not unusual for such renters to be unable to afford the entry barrier to purchase a house of their own, and I know that to be a fact with respect to the house next door. The people who live there are fully employed, and certainly contribute to the local economy.

I realize that governmental restrictions on the rental use of one's property can reasonably be regarded as an unjustifiable intrusion on an owner's property rights. But I also recognize the real need for affordable rental housing for those people who support the local economy. Frankly, with respect to my own opinion, I'm unable to resolve this contradiction.

Sven

This trend of high mortgage rates and high home prices cannot persist forever. Home sale and mortgage application have been declining for several months. Because there is limited inventory of houses for sale, the pricing still climbs in certain part of the country. Boise and Phoenix are some of the hot spots.

The demand for larger houses was driven from the pandemic. Will remote working from home become the new working model for all profession? Majority of my friends have had several weeks of remote working, all have since return to work full time and vaccination was the key.

My guess is that there will be fewer and fewer buyers in next several years. Returning to the pre-pandemic situation is anyone guess.

davfor

Is 7% coming soon?!.....

The average rate on the popular 30-year fixed mortgage rose 10 basis points to 6.28% Tuesday, according to Mortgage News Daily.

The rate was 5.55% one week ago.

The drastic rate jump this week is the worst since the so-called taper tantrum in July 2013, when investors sent Treasury yields soaring after the Fed said it would slow down its purchases of the bonds.

6.28%

Also, a city by city chart showing mortgage payment increases since January 1:

US mortgage payments are on the rise

Derf

Just in case you were wondering ...... here is the chart.
https://fred.stlouisfed.org/series/MORTGAGE30US/

Gary1952

An article on the radio explained that "first time buyers" define the housing market. The high-end homes can continue to increase.

davfor

Here is a link to the Mortgage News Daily Chart. It is current through today....

This page provides average 30 year fixed mortgage rates from several different surveys including Mortgage News Daily (daily index), Freddie Mac (weekly survey), Mortgage Bankers Association (weekly survey) and FHFA (monthly survey).

Mortgage Rates

hank

A rep from Metlife shined some light on the .75 bp rate hike (he thinks overdone) and the housing issue on Bloomberg this morning. On the latter he noted that by making houses less affordable, the higher rates are pushing more and more people into the rental market and driving rents higher. Rent is a big component of inflation as measured by various gages, Here. Wish I’d caught his name. One of the better, more insightful looks at the Fed, inflation, and markets I’ve heard in a while.

davfor

Here is statistical info that lends support to the comment @Junkster made:

Those with cash and/or other financial resources are not yet being squeezed.

Here is a comment that focuses on the single family rental market issue @hank mentioned:

The U.S. doesn't have enough homes to meet demand — even now, as fewer people want to buy in the face of rising mortgage rates...Rising mortgage rates could actually put more pressure on the rental market: As first-time buyers put off a new purchase, they'll continue to rely on renting.

Sadly, but not surprisingly, higher rents are hitting households with limited incomes the hardest. But, from an investment perspective, high demand for available rentals suggests there may continue to be opportunities for some single family rental investments. (A little over 10% of the high yield sleeve of my portfolio is invested in residential rental reits.)

BaluBalu

Does not Blackstone own a lot of single family rental properties?

davfor

@BaluBalu Here's a partial answer to your question. The Blackstone Real Estate Income Trust (BREIT) website can be accessed here. That site lists it's total asset value at $111B with 50% of the portfolio being in the residential sector. The Q1 2022 update states "Within residential....the portfolio is predominantly suburban, garden style apartments and is 85% concentrated in the Southern and Western U.S.". I am aware that BREIT made a $6B investment in single family housing rentals last year.

yogibearbull

See this M* thread on BREIT, https://community.morningstar.com/s/question/0D53o000060xKYGCA2/blackstone-real-estate

BaluBalu

Thank you, @davfor and @yogibearbull.

davfor

davfor said:

Is 7% coming soon?!.....

It took a while but has arrived.

US 30-Year Fixed Mortgage Rate Tops 7%, Hits Highest Since 2001

It surprises me how much the rate has increased this year. But, the Fed is now getting it's way. Sales prices are softening and demand has declined. There have even been reports of softening in rental rates in some areas. The housing related boom appears to be a thing of the past. Now I am wondering how hard the landing will be.