Between a rock and a hard place

It has been about 18 months since the Federal Reserve began its war on inflation by raising interest rates. The most sensitive sector of the economy to rate fluctuations is the housing market. The Fed consciously targeted housing as one area it could make the biggest impact.

The housing market in March 2022 when the Fed began this aggressive rate increase program was on fire, with steep price appreciation and strong buyer demand. Low mortgage rates in the 2 to 3% range allowed buyers to jump on the shrinking inventory and many homeowners refinanced into ultra-low monthly payments.

The 10-year treasury bond was at 1.8% and American consumers were flush with stimulus savings. The economy was floating in a sea of liquidity from years of the Fed printing money. There was so much excess money in the system that really dumb ideas sort of made sense, like crypto-currency and NFTs and meme stocks like AMC Theaters.

North Idaho real estate took off, as work-from-home salaries made the laidback lifestyle here reachable for escapees from urban blight. Intense demand from buyers, seller greed, and Fear Of Missing Out momentum created a huge value bubble. Any three-year-old with one of those magic wand soap bubble things in the park knows that bubbles pop and disappear, but the adults and experts and economists and our political leaders seemed stunned by the sudden deflation as rates dramatically rose.

The Fed succeeded in choking off the hot housing market, and so here we are in September 2023 stuck between a rock and a hard place. The market is stalled, directionless, muddled. Sale activity is half of what it was, prices have stopped going up, buyer demand has slacked off, mortgage rates are almost triple what they were 18 months ago, affordability is still a dream, new home builder sentiment is at a low point, sellers aren’t listing and buyers aren’t buying anyway. It’s all a hot mess.

It's times like these however, when cooler heads prevail. There are always positives. Investment companies that were binge-buying single family homes have abandoned the market, which is good news for buyers not having to compete with Wall Street money. And those few sellers who actually need to sell must now list with realistic expectations. Mortgage rates are not going to roll back, but even though 7% rates are relatively high, there is some degree of stability and consistency.

It isn’t just buyers feeling the pain of these higher rates: new home builders and existing home sellers will have to adjust pricing if they want to move inventory. There’s a lot of room for “adjustment,” maybe as much as a 20% decline.

Median home prices surged past the level of median household income affordability over the past few years. That median home itself is going to have to change, from a 2,400-square-foot, single-family, four bedroom, three bath on a quarter-acre lot, to a townhouse or other density-favorable format. The Old School method of building one home at a time with stick-frame lumber in questionable weather with a shrinking labor pool of construction workers is changing. There are emerging new approaches in factory-built shelters.

Here are a few lines from the website of one of the more innovative companies in the field that specializes in modern modular design:

We construct within a regulated indoor setting, immune to the conventional hindrances posed by weather and other typical disruptions.

Our streamlined and resource-effective construction approach demands a shorter duration and diminished labor requirement, ultimately leading to significant cost reductions.

Climate responsive and using locally sourced, 100% recyclable steel and sustainable building materials along with extremely low waste during the construction process.

The new approaches are revolutionary and exciting and will challenge the status quo. Maybe the housing sector needed to be squeezed between the rock and the hard place for real change to happen.

• • •

Raphael Barta is an associate broker with a practice in residential, vacant land and commercial/investment properties (raphaelb@sandpoint.com).