Hello BP Compatriots! Below is a brief, hopefully insightful, dive into real estate and/or financial markets for the week. Let me know what you think in the comments and what you are seeing in your local market? (I'm in Nashville).
Today we’re talkin:
- -Mortgage Rates take a decent step 👇
- -Is it a good time to buy a house? Or wait? I run through the numbers for you.
- -Market Outlook: Nashville
Today’s Interest Rate: 6.65%
(👇 .44% from this time last week, 30-yr mortgage)
Well, what a week! Federal Reserve Chair Powell made a historic pivot in rhetoric, tampering down his hawkish tone and re-posturing on interest rates, saying rate cuts are something that now “begins to come into view” and “clearly is a topic of discussion.” Before this the Fed was only talking about how many more rate hikes may be necessary and did not have any future predictions of rate cuts. Even going as far as saying: that discussion was “premature.” The Fed now is projecting 3 cuts in 2024. While it is important to note that we are still above the rate levels we had at the beginning of 2023 (6.45% Jan. 3rd, 2023), the momentum and official Fed outlook has shifted markedly in just a few days. For its part, the bond market is pricing in 3-6 rate cuts in 2024. So far the bond market has been right.
Still, the Fed did not change rates, only rhetoric. For now, this may be enough to begin a shift in demand for housing (and hopefully for builders as well to boost supply). As long as inflation continues lower. But to see a continued reduction in mortgage interest rates the Fed will have to actually cut rates. Will they wait until inflation is at 2%? That still may take a while.
So Now What?
Powell, , also reminded the crowd of reporters / analysts that the Federal Reserve has a dual mandate from Congress to maintain "maximum employment" and "stable prices." And on the inflation front, has made “real" progress.” So IMO, as long as employment doesn’t blow up above 5% (which traditionally has been considered ‘full employment’) and the rate of inflation continues a steady decline, peak interest rates have even reached, 30 days ago.
But, interest rates are still very high, is now a good time to buy a house?
Doubling down what I said back in October, I would argue no… It’s a fantastic time to buy a house. But, it’s a not so good time to sell one. Follow me here…
It is absolutely true that home affordability is at an all time low. Why? Interest rates have gone from 3% to 6.65%. To put this in perspective, a $400,000 home with a 20% down payment would have a monthly payment today of ~$705 more than it would have been two years ago. Put another way, the same mortgage 2 years ago would buy you a $600k house, now you can afford a $400k house. Meanwhile, inflation for most of life’s items, while the rate of increase has wained, are still getting more expensive.
Echoing this, the National Association of Realtors NAR Housing Affordability Index is at 91.4, as of October, down from 94.5 in September, the lowest reading since the 1980s. At this level, the median household earner can’t even get approved for a mortgage on a median-priced home. ** Important this chart does NOT include the last 30 days of rate decreases which will slightly improve this number but actually not move the needle significantly.
Home affordability is hurting buyer’s ability to buy, meaning, those looking to sell are having a hard time finding buyers and are being forced to lower their asking price. Price reductions are now not only commonplace, but savvy buyers who are able to afford the mortgage (or have cash) are finding themselves in the driver’s seat. See chart below of listing price vs final sales price. Buyers are negotiating large reductions in list price.
So while it is true that home affordability is at an all time low, this is a direct result of higher interest rates, not a systemic financial or housing crisis, as there was during ‘08-09. The Federal Reserve is holding rates artificially high on purpose, in an effort to slow the inflation wildfire, which again we all see in the grocery store. Gas prices are fortunately cooling, but total inflation today still is 3.1%, and that is on top of last year’s prices, which were 8% higher than the year previous. Inflation sucks because it compounds.
Once interest rate waters recede back to the 5 - 5.5% levels, home prices will spike dramatically higher (just like other rate sensitive assets) as literally millions of households get back into the market looking for a home. Demand 👆 = Price 👆. And you will have wanted to have purchased that home already. This may take 12-18 months, but it will happen.
Let’s look at a case example on a typical investment property or primary home and determine if the numbers tell us to buy now or wait…
Quick Example
Let’s say you are purchasing a home for $400k in Nashville, TN, using my home market as an example. (And see next section with my Nashville market update).
At 6.65%, your mortgage is $2454.
Let’s assume it takes 18 months for rates to come down by then to 5.5%. The 3% COVID-era mortgages are likely never happening again. FYSA, I also think a bottom of 5% will be our new “normal.”
Purchasing that home today will cost you 18 months of higher interest at 6.65% vs 5.5%: $238/ mo., or $4284.
So, if you purchase a home today you will want to make sure you get a deal, and pay $4284 less for the home than comparable homes. Hire a great agent and they will make this happen (Need one? Message me and I’ll give you a fantastic referral).
The Strategy?
Once rates come down, you refinance your current loan into that lower 5.5% (or lower) rate. Importantly, make sure to select the right lender, ask your agent for their preferred lender list, which any self-respecting one should have in their hip pocket. Many banks are offering free refinancing too, meaning no or very low closing costs to refinance into a cheaper rate. Lenders are calling this “Buy now, refinance later for free.” And check the fine print for any fees. Don’t pay those.
And let’s not forget we are in a buyer’s market. Why stop at $4284 off the purchase price? You can be much more aggressive in our home purchase negotiations.
So, is it a better idea to purchase a home now or wait?
Using my home market of Nashville, TN (one of the most resilient real estate markets for home prices) as an example, the median price reduction from list is still a whopping 22% or $129,000 on an average home of $704,000 (see chart above).
So, if we can get just an average deal, let’s say 15% off the purchase price, the shrewd investor / homebuyer can save 14x their money if they purchase a home today vs wait for interest rates to drop. Let me say that again, you are likely to save more than $50,000 on a $400k home if you purchase today vs wait for rates to rebound.
Further, it is important to note that home prices bottomed in January, and are rising on average since. Over the next 18 months home prices will likely continue to rise, and you will be missing out on that valuable home appreciation if you are sitting on the bench.
If home prices rise a conservative 5% in those 18 months while you are waiting, that’s an additional $20,000 you are missing out on, or 4.6x the amount you were trying to save in interest by waiting!
So, if you are a prospective homebuyer, the answer is yes. I would buy today vs waiting. It’s a no brainer.
Market Insights: Nashville
I buy real estate where there is growth. And one fantastic growth area continues to be Nashville, TN. Homebuilders/apartment builders recognize this and were building in 2023. Big time.
One criticism/discussion I often hear/have is will there be too much supply - too many homes - which will depress home values. In my opinion, thats a strong no. We are heavily under built and there is extreme pent up demand to purchase a home today. To back this up, just this week Bank of America analysts released a report showing we are still“underbuilding” and this has been going on for the last decade. In fact, we find ourselves in a "deficit of 4 million" U.S. homes. Interestingly, BofA said the exact same thing in 2021. We haven’t made up any ground despite some improvement in future supply.
Simply put, Bank of America thinks we went from an over-built nation pre-financial crisis to an under-built nation today. According to the report, “The most direct solution for the housing shortage problem is to build more homes.”
In fact - and I believe this is a critical point we also sometimes miss - if a city/locality doesn’t have robust homebuilding numbers, especially if the city/locality is experiencing robust growth , the underlying economy of the area is at risk. A city must have strong homebuilding numbers to maintain growth.
Bottom Line
If you are a first-time homebuyer, or investor, it’s a fantastic time to purchase a home. I wouldn’t advise selling, unless you have to. As long as you can afford/stomach/hold your nose at the moderately higher mortgage for 12-18 months, it should make far more financial sense to just eat that higher mortgage cost and refinance later into a rate for the long-term. This gives you the best of both worlds. Your investment today will likely make you several times your money back in additional interest payments for a temporary period of time. And if you can improve the home through renovation, or a little DIY, your home’s value will grow significantly faster.
I hope this has been insightful. Obviously I made some assumptions in calculations here but I tried to keep them conservative. I’m actively purchasing more rental properties myself. This is a fantastic time to be in real estate, waiting on the sidelines for interest rates to drop is like stepping over a nickel to pickup a penny. Just keep disciplined and make sure you get a good deal.
Favorite Tweet of the Week
This is why inventory is low. Most sellers are buyers. Why move if you have a low rate?
That’s it for this week. If you are interested in digging deeper into these ideas or talkin’ real estate investing - which I always love doing - don’t hesitate to reach out. You can DM me right here and I read every message personally.
Until next time.
Herzliche Grüße
-Andreas
* The preceding has been my opinion only, the views are my own, and are intended for educational and entertainment purposes only and does not constitute financial advice.
