Buying Tampa Bay
Buying Tampa Bay
31. Understanding Soaring Mortgage Rates and Shifting Dynamics in Today's Housing Market
Are you feeling the pinch from high mortgage rates and rising inflation? Join us as we dissect current housing market trends and shed light on why mortgage rates continue to soar, establishing a 7% "new normal". We take a journey back to 1995, to draw parallels and understand the affordability challenges in today's market. We discuss how recent bank failures have added fuel to the fire, pushing up the rate of mortgage-backed securities.
Turning our lens to the challenges home builders face, we delve into the dynamics of today's housing market. We explore the impact of recessions, material costs, and supply chain hiccups on new construction. Put yourself in the shoes of a Tampa Bay resident, where the average home sale price is $450,000, and the median household income is $60,000. We discuss the implications of such disparities on the future of the housing market and the potential influence of out-of-state and out-of-county buyers.
In our final segment, we ponder the shifting demands from existing homes to new construction. Embrace the thought of an increasing desirability gap between old and new homes. We discuss how work-from-home setups are influencing the housing market and whether the cost of upkeep in established communities could be less daunting than HOA fees in new communities. As we wrap up, we warn about the potential risks of taking out a HELOC at a high interest rate and paying for rental properties with credit cards, in light of possible rate hikes by the Federal Reserve. So join us and arm yourself with knowledge, for a balanced perspective on the market is the key to successful real estate ventures.
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Hello everybody, chase Clark here with your Mercadius buying Tampa Bay podcast, and we're glad to be back with you chatting a little bit about the housing market.
Speaker 1:We've been gone for much of the summer and, man, a lot has changed, or maybe a lot hasn't changed we thought would change. I think if we had looked back and wondered where we would be about this time at the start of the year, chase, we'd be thinking that the market would be well into its death spiral by now and that mortgage rates would have brought everything to an absolute standstill, that we'd be in the middle of a recession. That's certainly what we would have been thinking if we were listening to the talking heads about this time last year. But here we are in August of 2023, and by many measures, things couldn't be much different. So tell me a little bit about what you're seeing. Maybe we should start with a whole mortgage interest rate scenario, because that's driving so much of this picture. What are you seeing right now and why aren't we in a real estate death spiral that everyone was projecting we would be in?
Speaker 2:Hey Peter, what's up man? What is the million dollar question? Right, it's like when are mortgage rates going to go down? How did we get to 7 percent? It's a tough question, but 7 percent seems to have become the new normal. People are getting used to it. We're starting to see sales volumes stabilize a little bit and pick back up, but people are still asking that question all the time is when are rates coming down?
Speaker 2:And if you look at the papers, watch the news, read online, wherever your source of media is, you're always hearing about inflation numbers. Where is inflation? Regulatory rates are typically the 30 year fixed rate is tied to inflation. They're highly correlated and so we know inflation has come way down off its peaks of 8 or 9 percent, but during that same period of time, rates have stayed high or continued to rise. And people are like what's going on? As inflation goes down, rates should come down, and normally that's true.
Speaker 2:But if you remember back to the spring, we had this crazy event happen with bank failures. We had three of the largest bank failures occur in US history just this spring. And what happened with that was it shook up the Fed a little bit. The Fed got nervous, people got nervous. They kept raising rates, partially because the Fed looks in a rearview mirror. They always look backwards. They're not really looking at what's really happening today. They're looking at three, six, nine, 12 months in a rears, and so they kept raising rates. As the Fed raises rates, the rate that banks have to pay on deposits goes up, money market rates go up, and so people started pulling their money out of their checking accounts and putting them in money market funds so that they could get a higher rate of interest, and in doing so, banks had less money on hand at a low cost of capital to lend out at current interest rates. And so when that happens, banks had to recapitalize. They had to find funds that they could lend out, because people had moved their money into money market accounts where they can't have that as their reserve basis, and in doing so, banks started selling off their mortgage backed securities.
Speaker 2:The 30 year fixed rate is 100% tied to the bond market, and the mortgage backed security bond market is what's driving up these 30 year fixed rates. When banks sell bonds, the price goes down. They flooded the market with supply of bonds. When the price of bonds goes down, the interest rate on the bonds goes up and as the rate on the bonds goes up, that's what drives the 30 year fixed rate up, because it's tied to these mortgage backed securities. So, in a nutshell, the 30 year fixed rate is staying high because there is a glut of supply of these mortgage backed securities on the market, which is driving up the bond rates.
Speaker 2:And that's where we find ourselves right now. Will the rates go down? I don't know. You listen to experts. They're thinking we might get a half a point movement downward by the end of the year, which would take us back into the high six range. That's good Good for buyers out there looking for something a little cheaper on the interest rate front. But not a ton of movement expected in this market right now, unless we end up seeing a full blown recession, because rates always fall during your recession.
Speaker 1:Okay, so affordability and interest rates always seems to be the key question, right? And people are looking back and saying, you know, wow, interest rates seem so high relative to what I've experienced so far in my life or in my recent history. And so we have to go all the way back to almost like 1995 or earlier where we see interest rates equivalent to where they are today, in the low sevens. Right, so a long time ago. Chase, where are you at 95? Right, I was just. I would think I was like 15, right, so 16. Maybe I was in my junior year in high school. So I don't have a relevant perspective of what the market was like, at least the first hand perspective of what the market was like back then. So let's talk a little bit about that. You know, are what were folks doing from an affordability standpoint when rates were in the sevens? And you know how do they, how do they buy a home at all?
Speaker 2:Yes, you know. I mean, the typical benchmark rate is 30%, right? You don't want to spend more than 30% of your income on your mortgage and it's hard to get approved by a lender for anything over that, right? So as rates go up, there's two things at play. Have your wages grown during that time so that you can afford that higher rate and that higher payment, or is the price going to have to come down? Or is your budget going to have to be reduced so that the affordable price of a home for you is now less than it was a year ago?
Speaker 2:And for a lot of people that's the case. They just can't afford all the house that they want to have now because the rates seven, it's not four, and that's a big jump in rate, especially when you're talking about a median home price in the 400,000 range. So I think that's where people are finding themselves today, and the question we get all the time right is well, should I wait? Should I wait till rates come down to buy, or should I buy now? You know, and that's the question we have to address every day for people, and depending on what market you're in, that answer is going to vary, but here in Tampa Bay. There's a lot of data out there to suggest that you should not wait, right. So prices are continuing to rise and what you'll miss out on is greater than the extra interest you're going to pay if you wait for the rate to drop, let's say, a half a point.
Speaker 1:So you're saying that we're going to miss out on opportunities, that we will be in a worse financial situation if we wait to purchase real estate and we're waiting for an interest rate to fall than if we buy today?
Speaker 2:Yeah, you know, I listened to, you know a great resource in this in this area of the industry, barry Habib, the other day, and he gave this example from Palm Beach County, florida.
Speaker 2:Okay, in the next 12 months, home prices are expected in Florida in general expected to increase 3%. Right now we're hovering around the two and a half 3% range so far for 2023 as far as home price increases. By the end of the year, the forecast is that that's going to be at 6%. So we've got about another 3% to go over the next six to 12 months and what we'll call HPA or home price appreciation in the state of Florida, and rates are only predicted to drop about a half a point during that time. And so, if you do the math on that, you'll save $380 a month on your mortgage payment. If you wait for that rate to come down a half a point on average, right, but you're going to lose out on almost $39,000 of appreciation on an average home, and so the math just doesn't work. So you're definitely going to want to buy now and not wait for that half point reduction if a purchase is in your future, for the next, in the next 12 months of your future.
Speaker 1:Well then, talk about why we should feel like home prices will continue to grow, because that does seem to be the other half of all of this. If we're in a situation where interest rates remain high, where incomes may well I guess we're saying that incomes will grow, but may not grow at the same rates that we see an increase in home prices then why should we think necessarily that will continue to see an increase of home prices equal to 6% or so per year?
Speaker 2:It's simple supply and demand, right. What the forecasters showing us right now is that the supply of new homes coming into the market over the next 12 months is going to be about 1.4 million. Well, the demand for those homes is going to be closer to 1.6 million, and so anytime demand is outpacing supply, economics 101 tells you the price has to rise, and that is what we're seeing here in Florida. Definitely what we're seeing here in Tampa Bay is we just can't produce enough new housing units to meet the demand of everyone that wants housing in this area, right, so this week, big news broke in the investor world that Warren Buffett, spirks your Hathaway made substantial investments in some of our nation's largest home builders.
Speaker 1:They got included DR Horton and Linnar and NVR, and he bought up with equivalent of about 780 million or so in shares of these assets. So he was sending a strong signal to the market that what we're seeing here is as likely going to be of continued strong growth in the home builder segment. Your statement is that your sentiment is the reason why we're seeing major investment in home builders, because that is the only way we can really address the supply side of this equation, and that's what is causing home prices and demand really to be where it is right now Insufficient supply. We can't make existing home product out of thin air. We can make new home product, and new home product is what is absolutely necessary to meet this strong demand for homes.
Speaker 2:Yeah, that's exactly right, and you know, the process of building a new home doesn't happen overnight. These builders have to go out and acquire the land, get the entitlements, permit the houses, get the houses built and then sell the homes to these people that want them, and that process can take at least 12 months. And so these forecasts for new home construction are pretty accurate, because we know how many homes are going to get built in the next 12 months, because they're already permitted today, and so we can easily look at active permits and figure out how much of that demand are we going to be able to meet over a 12 month time horizon.
Speaker 1:So we've heard for all year about the gray cloud hanging over the home builders. We saw home builder shares down at record lows earlier in the year and now we have home builder shares moving in the exact opposite direction and buoyed largely by these major votes of confidence by big institutional investors like Berkshire. So tell me about that roller coaster. I mean what? Why is a market that is rational? I mean, if it's a year of inventory and we know a year ahead of time what demand will be like, why is it that, like eight months ago, we were trying to bury some of these home builders?
Speaker 2:Well, I think a couple of things that are played right when you're talking about large, national, publicly traded home builders. They have to look at the national dynamic and the national economy when they make decisions about how much they're going to build, where they're going to build and do all that and they've got shareholders they're responsible to and ultimately their stock price is really what matters. And when there is the fear of a recession on the horizon, I think that gives some of these big builders a little bit of pause about. Will those 1.6 million people really be there when the homes are finished and will they be able to afford our homes? That's definitely part of the equation.
Speaker 2:And then I think the other part of the equation that we're still dealing with coming out of COVID are material costs and material supply chains. They've gotten so much better over the past six to 12 months now, but they're still not where a lot of people feel like they should be. Especially when it comes to prices of materials. They continue to fluctuate, and so a lot of these big builders try to lock in long term contracts with fixed costs for certain supplies, and if their suppliers now aren't able to fulfill that contract or meet that supply demand. That's going to kind of slow down that process of new construction.
Speaker 1:Chase. One of the things that seems to continue to be troublesome, at least in theory, is the idea that the average sale price for homes in July was somewhere around $450,000 in our local market here in Florida $450,000. And the median household income is well about $60,000. I think, if we you know, it was $60,000 in 2021. So a couple years later we could probably trend it up that's census data in 2021. We can trend it up probably about 10%. We're in the mid-60s in all likelihood for our median household incomes in that same market, with average sale prices nearly six times what the median household income is. How does that? What kind of future does that portend or project for affordability of homes, or is there something that we're missing in that?
Speaker 2:Yeah, you know that's a good question. That's the million dollar question everyone's been asking is, okay, affordability. You know what's happening here. I mean if you look at that $60,000 median household income, if you go out and buy a $450,000 house and let's say you have $50,000 to put down and so you're going to borrow $400,000 right now at 7%, you're going to spend half of your gross income on your mortgage payment. A lender won't allow that. So I mean you've got to have two incomes on average in a household to be able to afford.
Speaker 2:You know what's out there on the market to buy on average right now $450,000 purchase price, and I think there's some things that play there. Right. When we look in Tampa Bay, if your household income is $60,000 a year, you really can't afford to live here unless you've lived here for a long time. I was doing the math with some first time home buyers the other day and what I see is the threshold for being able to afford that $450,000 or $450,000 home is a gross household income of around $120,000 a year is what I see to be able to afford a new home and live in Tampa Bay in a comfortable but not extravagant way. A very modest living here in Tampa Bay right now is requiring that kind of household income.
Speaker 1:Right. So that's about twice the current average household income in our county, which is probably in Hillsborough County. It's somewhere around the mid 60,000. That's a huge step up. So I think you have to conclude, then, that one of two things is happening Either the buyers are well above the median household from an socioeconomic standpoint, or we have non-county and non-state residents purchasing these products. You have people who are not influenced by median household income statistics. That's not their economic reality, right, which you could certainly make the case for.
Speaker 1:If we look at our migration stats into the state, how much do you think it's out of state buyers, out of county buyers, that are driving the demand for homes in our local area?
Speaker 1:We have some data that circulated around our office that about 30 to 35% of all home sales in 2022 were cash purchases in Florida, and so we're thinking about that reality.
Speaker 1:These are people who are not going to be constrained by mortgage, by the need for a mortgage or the need to justify a household income of close to the ratios that are required by lenders in order to buy them. These are people who are going to be able to or at least 30% of all the buyers are going to be able to pay cash for a property. That may also affect what we see in terms of the unaffordability potential of these ratios, that you have plenty of people moving into the area that might be retirees that might have sold a homestead property in another area. They may report a lower than average, a lower than necessary household income in order to justify that purchase price. But since they're flush with cash through a sale or through retirement, that doesn't really matter, right? They're going to buy this home at these average prices and compared to where they're coming from, they're still wonderful bargains. They're still tremendous value for money at $400,000 on average, compared to what they're paying for in the Northeast or in the major metro areas of the United States.
Speaker 2:Well, it really is hard to believe when you start hearing talk of an impending recession because there does seem to be so much money still out there sitting on the sidelines for people ready to buy a new home, invest in a business, spend money on vacations. I mean, we were in Europe this summer, right, I couldn't believe, like I mean that when you look at the stats on pent up vacation demand and how much money people are spending on European vacations this summer. So the economy has been good in general to the public and they have money. And I don't think there's a single segment, price segment of the housing market right now that's suffering, right, you would expect that, like, million dollar homes would be sitting on the market right now. Or, like you know, there's a 15 million dollar home that was just listed over in Clearwater right, that was, I think it was sold within four months. So I mean, that's a different echelon of somebody looking at a $400,000 new home, new construction home, or a $350,000 town home.
Speaker 2:But all segments of the market seem to be doing okay. So I don't know where the actual impact is going to show up first. Right, we've started to see a little bit of lag in rents. From a standpoint of. It's not the you know red hot rent market that we had, where you could just name your price and someone would pay it that we had six months ago. Right, we're starting to see more discerning renters that are starting to have options on that side of the market, and I'm not sure if that's because of home ownership conversions or you know what's driving that kind of dynamic here in Tampa Bay. But we have seen what I feel like is a little bit of softening there, not that rents are going down, it's just that there is more available for people to choose from.
Speaker 1:Well, what's your opinion will be then? If we continue to see major development in the new home category and that that ends up being the product of target, the desirable product for most buyers in this area, we certainly will have existing homes all throughout our areas, certainly our urban course, and those existing homes will not be, will not be of the quality or of the standard in a lot of cases of what new homes are built are being built right now. Right now and into the future they won't have the same amenities, the same upgrades. In some cases they will be in established neighborhoods and fairly good locations, but but they will not be the same in appearance or potentially in desirability as new home construction will be. That gap will continue to widen between the age of those, the vintage of those two homes.
Speaker 1:We might see a case emerging of a very substantial bifurcation in the housing market of old homes and new. Do you sense that will create any kind of problem for the old home segment? Well, we start seeing strong demand for new homes, lots of retirees who want or a new home buyers who want a low maintenance product. But we'll see stuff that's already been built and now there's aging up into that 60 and 70 and 80 years old, which won't be as desirable. There'll be those smaller ranch houses built in the mid 50s of the 1900s right which will have three bedrooms and one bathroom and no garage, which won't be as attractive for that person moving into the area or even that person starting to buy a home, and we'll see some languishing potentially in that product segment. What do you think? Where will we see? How will we see that shaking out and what does? What do we do as investors who might own some of that, or home owners who might own some of that older product, to stay ahead of what might be a preferential shift to new homes?
Speaker 2:Yeah.
Speaker 2:So you know, right at the top of my head, the first thing I think about when it comes to new construction is distance from the urban core right, and that hasn't really mattered to people so much over the past three years because of the work from home set up that most people have enjoyed, right.
Speaker 2:I think a lot of this is going to depend on whether that trend continues and what percentage of any given local population continues to not have to fight traffic to the urban core right because, like the heights, seminal heights here in town, water street, all of these type of communities Davis Island, south Tampa part of the reason that these communities have been so strong in value and desirability over the years has a lot to do with their proximity to urban centers of work. Now you've got people moving to Dade City to live in Marata because they built a lagoon out there and they don't have to make that commute because that commute would be something. You know that people would start to reconsider after a few months of everyone going back downtown. I think that's going to be a big driver of that. You know new constructions always prefer to existing by most people, but location is the trump card when location matters.
Speaker 1:Right. So your position will be that if we can maintain a work from home environment or if the employment centers move into the suburbs close to where the new construction will be, then we'll continue to see strong growth trends outside of earth and cores into new construction communities. But the converse, if we need to move back into some kind of a concentric, a reasonable concentric radius from our, from our employment centers, then we'll see an increase in demand for infill and for older construction homes and then certainly what we'll follow, I imagine, is ongoing investments in renovating, upgrading and improving those in those interior homes, even though they're aging, to make them acceptable for buyers who want to live close to their jobs.
Speaker 2:Yeah, and one other thing to consider in that is, if you move into a 40, 60, 80 year old, established community, it's not likely that you have an HOA, and so sometimes it's going to be pure preference, right?
Speaker 2:You want mature landscaping, you want character in your home. Do you want to be somewhere where it's been well established and you've got generational families at play? Or do you want to go into a suburban you know suburban, new construction type environment where you know your oak trees are three centimeters around and you've got a play place next door to your house and you've got a tiny postage stamp that's enclosed by a white PVC fence and you know your neighbor's house you can touch when you put your arm out the window and you've got to pay, you know, $200, $300 a month to an HOA for amenities that may not mean anything to you, the cost of upkeep and renovation of an older home and an established community, maybe less costly than the HOA fee you're paying every month. So there's a lot of different variables and people have different tastes and desirabilities when it comes to their place of abode. But you know, new construction is always a safe play in people's minds because everything's new and no one likes to fix anything.
Speaker 1:You know we can say that the experiment with 100 and 100 plus year old housing in America is a relatively new one. But because there aren't that many communities where we have 100 year old housing where people are still able to live in it. Right, but increasingly we do. Right, we have inner city areas in many of our major cities where housing is 100 or more years old and you know, we even have some suburbs and some of our more established communities in the northeast and the west coast which is in excess of 100 years. You know what remains after 100 years? What is still sound and habitable in many cases tends to be extremely desirable. Right, because it has a location, but it also has oodles of character, just like buckets. Right, it's using the kind of lifestyle that people want to have, because it has character from a bygone era and it has been, you know, upgraded or you know maintained to a standard that people nowadays want to live in.
Speaker 1:So we must, I suppose, make the assumption that the ingenuity of homeowners and the American people will outlast the obsolescence of the homes that were built 70 years ago, that we will make improvements in that product and improvements of the desirability of that product to meet our current desires and we're not just going to allow that to be demoed and you fall into disrepair entirely. There's stuff that will right. Certainly there's some communities that are thoroughly obsolete and built out with obsolete product and the future of those remains uncertain. But that's certainly not all. That's certainly nowhere close to all of even the homes that were built in the 40s and the 50s here in Florida. So I guess have a little faith in your fellow man. Maybe have a little faith in your urban planning centers and your neighbors and their ability to be able to turn their old homes into something desirable. That might also help. You have established confidence in infill areas.
Speaker 2:Yeah, yeah, you know two quick things about that, about this new home versus existing home concept, and one of the things driving new home sales right now are that I've worked recently with three different buyers, with three different builders, and these three national builders are offering these buyers a 4.99 fixed 30 year fixed rate on a loan through their internal mortgage company and $30,000 to pay for that rate buy down and their closing costs. And so when you look at that, when you're looking at a rate right now of seven, seven and eight on a 30 year fixed loan in the Traditional market versus a subsidized rate from a builder's lender at 4.99%, not only can you now qualify for a much higher price, and we know the builders rolling a lot of that cost into the price of the home and their Profit margin is is still pretty healthy, but that's a very attractive play for any buyer right now and I think that is is a significant play in driving people to new construction right now.
Speaker 1:these subsidized rates and yeah, without a doubt, they're locking in the cost at a far lower basis because of these mortgage companies, because these builders are able to Control the economics of the mortgage.
Speaker 2:Yeah, the other thing I think that that's at play is one of the reasons We've seen such a dearth of supply on the existing home front over the last 12 months is because during COVID, people renovated their homes, remember, I mean, we were hearing for months about people taking out home equity lines of credit, putting pools in, remodeling their kitchens and building offices in their homes to work and you know, all of these things, all these upgrades They've always wanted to do. Well, they did it during COVID because they were home for two years, right, and you know they figured I hate now's the time to do this. Well, those helox that they took out on those existing homes are now at 9 plus percent interest. So when they took them out they were at 5, now they're at 9. Okay, if they haven't paid these things off or are making good progress paying these things off, these things are gonna get painful for people. If people put their rentals on credit cards, credit card rates right now are 22 and a half percent on average. That's very painful.
Speaker 2:So if you're in an existing home that you fixed up real nice you're like I'm not gonna sell because I can't go anywhere. I don't want to pay market prices for something new. But now you've added four, five, six, seven hundred dollars a month onto your payment and you're thinking, hmm, that house out there in Dade City that's brand new and the builders gonna subsidize me at 4.99 percent. That's looking pretty good, and I've got a hundred fifty thousand dollars of equity in this house. Maybe it is time to sell and go to the suburbs. You know, and I think we're gonna maybe, maybe, start seeing some of that kind of thinking here over the next 12 months and some of the more you know. Desirable premium area existing home inventory.
Speaker 1:Well, without the fear of recession hanging over everyone's head the way it was 12 months ago. I certainly see, and I certainly sense, a resurgence in confidence all across the board, from folks who are interested in buying A new construction to existing homeowners who are willing to take the shot now of selling and seeing what they can, what they can try To get on the market. The constrained inventory continues to be a strong driver of high prices here, and so we have not seen a falloff in home prices that would force people to have to stay in their homes or Necessarily to force them to sell right now to avoid this decline. So that can work both ways. But overall confidence remains strong and I think we're gonna see increasingly people willing to take a risk on some of this. The risk doesn't look like it's that dangerous.
Speaker 2:Yeah, so you know. A reference Barry Habib one more time in this podcast, because I feel like he's excellent. If you can get a hold His material it's great. One thing he said the other day on one of his shows was that there actually still is a great risk for recession and it lies in the hands of the Fed. If the Fed continues to hike interest rates over the next six months, it's almost undoubtedly going to lead to a recession. Just based on the economic factors and math alone, it will cause a short-term recession. So it'll be interesting to see if the Fed is going to continue to hike those short-term interest rates and what impact that continues to have on the business environment. Right, because business lines of credit are at 9% now and they're going to 10. That's really painful for businesses that need working capital to operate, and so we'll see what kind of constraint that puts on the economy if we do see another one or two rate hikes, like direct Hikes, like Jerome Powell is talking about doing, over the next six months.
Speaker 1:Well, definitely a sobering thought and something to keep some of the maybe unbridled optimism in check. I'm glad we have both perspectives because you don't want runaway fear or runaway optimism to take over. That's when mistakes happen for sure. So interesting conversation today, glad, worth. This point in the year we can start looking back at some of the projections for the start of the year and see that they didn't entirely pan out. We can start looking ahead to see the one to see how we might be able to reevaluate our projections for the future and make good decisions. But great stuff chasing working folks. Go to learn a little bit more about what we're talking about here.
Speaker 2:Yeah, check us out on home prop comm. We've got a robust website there. We can help you with any of your needs in real estate buy, sell transactions, investment properties, property management. Look us up, contact us and let's see if we can help you on your way in your real estate ventures.
Speaker 1:Great stuff. Say so we can talk to you and I go next time to see you out. See you later, you.