Mid-year update
Raphael Barta
It’s only mid-August as I write this column, but already I’m hearing summer is waning. For those of us here in North Idaho who wait patiently for months in the damp and cold darkness, we don’t want summer to go by too fast. But it’s also the end of Quarter 1 and Quarter 2: a good time to reflect on what happened so far this year, and where the real estate markets might be headed in Q3 and Q4.
For the first six months of this year, much of the focus has been on interest rates. In the residential market, the 30-year fixed rate hovered around 7%-plus. For commercial and industrial properties, the rate was higher, mid-8s to 9%. Before the Fed rate hike program that began in early 2022, when a project was in the planning stage and interest rates were half of what they are now, the economy was humming along, employment prospects were bright, and the project looked solid on paper. But it was a different environment in Q1 and Q2. It’s not just that the cost of borrowing doubled, it was also the uncertainties about where the economy was going with the consensus being either a soft landing recession or a crash recession. Neither scenario is positive for proceeding with new projects, so we haven’t seen much speculative activity in the commercial and industrial sectors. Vacancy rates in the office and warehouse sectors are still low so rents haven’t declined, but construction costs (labor and material) remain high.
Banks have been very careful in lending to new ventures, which has restricted supply. Multifamily projects had been one of the stronger growth areas as housing affordability turned many would-be buyers into renters, but with employment slowing and too many apartment projects in the pipeline, rents have begun to soften and many developments have been put on hold. The story for Q1 and Q2 was very much “wait and see.” Single-family home sales did not crash, however: 2024 is marginally ahead of 2023 in sales volume throughout North Idaho. List prices held steady while the Days On Market metric increased: no more bidding wars! The inventory of homes for sale also increased, but not enough to put downward pressure on pricing. The appreciation over the past several years has been so dramatic that prices need to fall by 15% to make a difference in demand.
It is widely believed the Fed is winning the fight against inflation, and will drop the benchmark interest rate by as much as half a point at its September meeting. This has already been priced into the market, but the reality of it (as opposed to the speculation of it) would be a boost to real estate. Home sales are seasonal: Q2 is usually a strong selling season. This year it was rather muted, so a significant decrease in mortgage rates would really boost Q3 with all the pent-up demand. Savvy buyers and investors will want to be in the market before they ring the bell to signal all is well. (By the way, no one rings a bell to signal a market turnaround: that’s how smart money makes good decisions…)
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Raphael Barta is an Associate Broker with an active practice in residential, vacant land and commercial/investment properties (raphaelb@sandpoint.com).
