OPINION: End of year roundup
Raphael Barta
2023 will go down in real estate history as the Year of Reckoning. Sales of single-family homes dipped to 25-year lows. Mortgage rates hit the highest levels in 25 years. There were fewer buyers and fewer sellers as each group sat on the sidelines waiting for some clear direction. The homes that were actually listed were no bargain, as prices stayed stubbornly stuck, and the affordability gap widened. A class action lawsuit was successful in challenging the commission-based business model of conventional real estate brokerages, which will have significant repercussions going forward for how sellers and buyers are represented. Commercial office buildings remained half-full as the work-from-home revolution continued even after the pandemic quarantine that spawned it in the first place. Downtowns that were feeding off the daily influx of office workers became ghost towns. There really wasn’t much good news in any sector of the real estate economy.
Classic economic theory holds that strong consistent demand stimulates supply. It should be simple: there are more buyers than there are new homes, so the building industry should be cranking out supply to meet the demand. But shortages of skilled construction workers, archaic zoning regulations, the long lead times to bring new homes to market, and those pesky high interest rates, are keeping new home starts to way below what is required. The backlog is enormous, with a general consensus that about five million new homes are needed nationally. Right now. Obviously that’s not gonna happen, so working our way out of the limited supply issue will take some time. And even if the industry could react quickly, would it build what buyers need and can afford? Look at the local situation: there are several subdivisions with only a handful of homes under construction, and these are larger three- and four-bedroom homes with square footage that drives the price upward.
The components cost of building almost forces this development approach: the acquisition of the raw land, the installation of sanitary and storm sewer, water and electricity lines, the time it took to get through the zoning process, the survey and engineering fees, the minimum lot size regulations, all create a base cost that only selling for the higher multiples can overcome. When interest rates were 3%, the developer could afford the construction loan for the 18 months to bring a subdivision to market, and the buyers could afford the higher price multiples for the larger homes. When mortgage rates almost tripled, that brought it all to a screeching halt. At the same time, the sale of existing homes stalled because would-be sellers were not trading in their 3% mortgages for the new 8% rates. The market is paralyzed: the only movement in home transactions is from deaths, divorces and employment relocations.
In early December as I write this, it is easier for people to focus on the holidays: at least that makes them feel good. Place the focus on family and friends. Wait for the real estate market to find some equilibrium. There’s no sense of urgency, no FOMO about the housing market. The media still talks about a possible recession, inflation is still not for-sure beaten down, the Fed is playing coy about interest rates, and we have two unpalatable candidates running for president in yet another divisive election cycle. People usually seek out an expert to advise them on a course of action. What if the best advice might be “Do Nothing?” Wait it out, be patient. No ecosystem as complex as the real estate market stays stagnant for long. Merry Christmas!
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Raphael Barta is an associate broker with an active practice in residential, vacant land and commercial/industrial properties (raphaelb@sandpoint.com).
