Wells: Sorting out the impact of the latest economic signals
Remember the children’s book “Inside Outside Upside Down” featuring the Berenstain Bears? Sounds a little like the current state of the economy.
With nearly simultaneous news of banks failing, employment booming, and inflation still on the march, it’s difficult to make sense of what direction the economy is going. If you’re a would-be homebuyer or seller, what does it all mean for you?
Before we discuss that, a quick recap.
The month of March showed us that employers were adding jobs at a higher rate than expected, and inflation — while slowing — is not retreating as quickly as it did in the fall and winter months. Consequently, the Federal Reserve continued to incrementally hike its lending rates to banks, which caused mortgage rates to inch up. Amid this activity, we witnessed the sudden failure of two notable American banks — Silicon Valley Bank and Signature Bank — and the large Swiss Bank CreditSuisse.
So, how is this predicament likely to impact real estate? Should you stay on the sidelines if you’re a buyer or seller?
We see four reasons to believe the housing market in Northern Colorado will be resilient this spring and summer, and why you should stay the course.
First, seasonality matters. We’re entering the traditional buying season. With a relatively strong job market in Northern Colorado, people need to move or want to move. If you’re a seller, there will be buyers, and vice versa.
Second, mortgage rates aren’t going back to 3%. People are learning to accept the reality of the mortgage rate structure. When rates for 30-year loans jumped last year from about 3% to 6%-plus, it caused many would-be buyers to back off. Now that the new mortgage reality has sunk in (remember, 6% is in line with the long-term average over the past 25 years), consumers have adjusted their thinking. They can’t keep life on hold when there are reasons to move, such as new jobs and growing families.
Third, new construction homes are a relative bargain. When higher mortgage rates caused buyers to hit the pause button, homebuilders suddenly found themselves holding on to unexpected inventory. For context, new construction homes typically represent about 15% of housing inventory at any given time. Currently, new homes account for about 30% of inventory.
Needing to unload this supply, builders have been offering mortgage rate buydowns and other incentives to attract business. One industry resource estimated that 75% of builders nationwide were offering buydowns early this year.
Fourth, pent up demand is out there. Just because home buying slowed down last year, doesn’t mean there’s no longer interest in owning a home. If you’re in a reasonable position financially to buy a home now, you shouldn’t wait until the next wave of buyers jumps back into the market, when you could find yourself in a bidding war over a limited supply of properties. There’s a real risk to playing the waiting game. And remember, if interest rates come down just a little, you can always refinance to improve your monthly payment.
Furthermore, with the backdrop of all the economic uncertainty we discussed at the outset, there’s the relevant question of where best to put your money. While stocks and bonds and other short-term assets are in a volatile state these days, real estate remains a time-tested, long-term buy-and-hold strategy.
Brandon Wells is president of The Group Inc. Real Estate, founded in Fort Collins in 1976 with six locations in Northern Colorado. He can be reached at firstname.lastname@example.org or 970-430-6463.