“In our business, the windows of opportunity open and close with dazzling rapidity… I constantly have to remind people to seize the moment.’” Mark McCormack
I believe that toward the end of the year there is going to be a window of opportunity where those who are ready, willing and able to act will be rewarded with an opportunity that won’t be seen again for a long time.
What do I mean by that?
Looking at the market forces, it appears that we are moving into a period of time where supply will increase, mortgage rates will come down, and rent prices will increase. The result can be a winner for buyers and investors three ways over. Let’s look at why.
Supply of Homes For Sale
The number of listings for sale (supply) is increasing – not a lot, but certainly some. Who are the people selling right now? There are a certain number of people who have held off moving and are now at the point where it’s time. This could be the result of a growing family, a job change that requires relocation, or they may be getting priced out of the property they own – even though they have a low mortgage rate.
Think about it, what did people buying real estate back in 2020 – 2022 do when mortgage rates were so low? Do you think they play it conservative with their purchase prices or did they go all in because rates were so low and buy a more expensive property? I know, they went big.
The Increasing Cost of Living is Forcing Folks to Move
We are starting to see more sellers who are simply getting priced out of their houses because of what it costs them to live in it. They may have a low mortgage payment and equity in their property but the cost to own has increased to the point they can’t or don’t want to cover the monthly expense anymore. Think about what has happened to the cost of:
- Home and auto insurance over the last few years.
- Heating, cooling and maintaining the home.
- The cost to live – gas, food, and stuff.
All these costs have combined to put a lot of pressure on folks’ checkbooks beyond the mortgage payment. The solution for some owners with a lot of equity will be to sell, capture the profit and move to a new place that is more affordable.
It sucks for sellers but it’s good news for buyers.
This is good news for buyers because when supply increases buyers;
- Have more options to choose from.
- Generally speaking, prices tend to soften.
- Again, generally speaking, sellers’ terms and conditions soften.
Mortgage Rates
We all understand that when mortgage rates come down buyers have more purchasing power and therefore… buy homes.
Here are a couple of questions we are all considering: When and why will mortgage rates come down? Here’s why.
In March of 2022, the FED started raising the federal funds rate to get inflation under control. They raised them eleven times between March 2022 and July 2023. Fed Chairman, Jerome Powell, has said he wants the CPI rate (Inflation) to be at 2% per year. It is currently at 3.48%. It was as high as 8% in 2022.
April CPI (Consumer Price Index – Inflation)
The FOMC’s (Federal Open Market Committee) met on May 1 and decided not to move Federal Funds Rate. The FOMC wants to see inflation slow down after successive monthly increases of 0.4% in February and March. The April number will come out on May 15. For those interested, the FOMC’s target is a monthly increase of 0.2% or less. This would hit Chairman Powell’s target and likely trigger a rate cut.
Here’s Why Mortgage Rates Will Come Down
Shelter Price Impact
Shelter as a category carries a large weight; it contributes 36% to the CPI reading and the FED has built in a 5.7% annual inflation rate into the March 2024 shelter number. Hence more than half of the current 3.48% CPI inflation to March 2024 is due to the contribution of rising shelter costs. Shelter is housing and rents.
Shelter Price Trend
Forbes Magazine is reporting that rental growth seems to have slowed from the major spikes of 2021.
March Multi-family Rents are 3.6% higher than at the same time last year. The average growth in 2018 and 2019 was 4.1%. Companies that track this stuff like Rent.com and the Zillow Observed Rent Index point to lower rates of shelter cost inflation. For example Zillow estimates 3.6% to March 2024, which is significantly lower than the CPI’s 5.7% built in by the Fed.
Single-family homes sales. According to the Motley Fool, The median home sales price in the United States is $420,800 as of the first quarter of 2024. That’s down 0.6% from the fourth quarter 2023. Again, that is significantly lower than the CPI’s 5.7% built in estimate.
Destin Area Condos and Houses
Prices are a bit up and down but the overall trendline for median sales price of Destin Area Condos shows a slight decline. Houses in Destin have been more up and down with a trend line showing and increase in prices.
30A Condos and Houses
30A Condos are hard to get a read on with the big bubble last fall, but the trend line is up slightly. 30A homes are showing a downward trend.
Panama City Beach Condos and Houses
Panama City Beach Condos like the Destin Area are showing a declining price trend. Not huge but it’s clearly declining. Looking a Panama City Beach median sales prices for homes you can see the trend is pretty flat, certainly not massively up.
The Lag Factor
The reason a lot of economists believe the rates will come down is because shelter numbers are a lagging indicator. They run six months to as much as twelve months behind. That means the current CPI number is reflecting the price of rent and housing from six to twelve months ago and as we just showed, prices for both are down. They are certainly below the 5.7% the Fed has built into the CPI number. Because of this lag, there is an expectation that sometime this fall the CPI number will reflect the current lower than estimated shelter inflation and reach the FED’s 2% goal. If that happens, look for rates to drop
I pulled this graph put out by Barry L. Ritholtz, the co-founder, chairman, and chief investment officer of Ritholtz Wealth Management LLC. to show the relationship between shelter and the rest of the CPI.
What Happens to Real Estate This Fall
So many people are gathering, waiting for the rates to come down so that they can afford to buy again and with every month rates don’t go down, more people add to the crowd. Think about it, buyers haven’t gone away, they have simply put off buying until prices, rates or both come down.
Some Buyers Will Be Rewarded.
The buyers who have their act together will be positioned to take advantage of the largest supply of properties listed for sale in a long time. In addition to more choices, they will also be able to take advantage of lower interest rates. Here’s another advantage the early movers will enjoy -they will be negotiating with sellers who are more willing to agree to lower price, terms and conditions.
A very good time is coming for the buyers who are ready to pounce but the closing window theory will definitely be a factor.
The closing window theory.
On a nice day in the spring have you ever wanted to open a window at your house or office to let some fresh air in? And it becomes the equivalent of some game of chance? The windows have those little tabs on the side that you would pinch in as you lifted the window open to the height wanted. I have big fingers so I would always pinch my fingers on those damn things. Anyway, you squeeze the tabs and then release them at the appropriate height to snap into the slots in the side rails which would hold the window in place? Know what I’m talking about?
Then when you want to close them you squeeze the taps and – in theory – gently lower the window closed. But sometimes the window would get loose and fall like a guillotine slamming shut. Hopefully you were able to get your fingers out of the way.
Well, this market is going to be like that window. The buyers who are at the front of the line and have their act together (financing in place, they know what they want to buy, have their Realtor on standby and are ready to pull the trigger) will get to buy while the window is wide open. Those that are late to the party or are busy getting their “poop in a group” are going to deal with the fast closing guillotine of a window.
Here’s why. This is important.
Once the sellers, who haven’t already sold off, understand that buyers are back and have purchasing power because of low rates, they are going to raise their price and become much tighter with their negotiations. Makes sense, right?
Any new seller’s coming to the market will also adjust their expectations based on demand and the new affordability caused by the lower mortgage rates. The result? Supply of relatively inexpensive properties will evaporate and the new round of buyers will be facing a low supply and high price market again.
What Should You Do?
Bottom Line?
Committed to your success,
John Moran – CEO
The Smart Beach Investor | Keller Williams Realty AT THE BEACH TEAM We Make Real Estate Easy.