Low interest rates are causing homeowners to sit tight on new listings, slowing down the housing market.
Back in March and again in August, it was noted that “the affordability limits for Americans are undoubtedly reaching their limits,” causing “a correction” without the unpleasantness of a crash.
Compared to the teaser rates of the early- to mid-aughts, the real estate market is now buoyed by much more qualified buyers with substantial equity in their homes, long-term, low-interest, fixed debt, unlike in 2008. Charts showing mortgage originations according to credit score might help illustrate that point.
There was one thing, however, that was clearly misunderstood. “Political will” wasn’t sufficient to really tackle inflation. There is still a possibility that the Fed could abandon its current course at any time. As long as we continue to see rate hikes and there is no clear indication of how long they will last, we will continue to see high interest rates.
It’s true that a 3% mortgage last year would be more than double that amount today. According to Dave Meyer, the Fed wants a housing correction to reduce inflation and address near-historic levels of unaffordability.
Where does that leave us?
A Housing Correction and the “Sellers Strike”
There were almost 600 fewer new listings in September 2022 than in September 2021, a 12.9% decrease from 2021. The decline was a full 15.5% from 2020.
In September 2022, inventory rose from 1.5 to 1.7 months despite rate increases. Considering how odd the current market is, this is still considered a “seller’s market.”
New listings follow a cyclical pattern and typically fall off during the winter, so we should look at year-over-year (YoY) comparisons here. Nationally, the number of new listings declined 23.6% YoY in October.
Despite this, homes for sale are still up 5% from last October. More than 20% of buyers backed out of contracts after signing them, leading to an increase in inventory. Also, some amusing headlines are included, such as “average sale-to-list-price ratio fell to 99% in September.” It had been a shade over 103%.
There aren’t many good reasons for homeowners to try and sell their homes at the moment, which Bill McBride calls “the sellers strike.” Therefore, they don’t. As a result, we can expect this trend to accelerate and last for quite some time.
Americans Are Staying Put
Recent years have seen a significant decline in the number of Americans who move from one place to another. According to The Hill in 2021:
“New data from the U.S. Census Bureau shows just 8.4 percent of Americans live in a different house than they lived in a year ago. That is the lowest rate of movement that the bureau has recorded at any time since 1948.
“That share means that about 27.1 million people moved homes in the last year, also the lowest ever recorded.”
Record lows were being set even before the pandemic. Many factors contribute to this, such as an aging population, fewer children, and the high cost of housing.
The number of new home listings was also declining before prices went through the roof and rates were raised.
As a result of the recent recession, the average length of homeownership increased from seven to eight years. It is even more dramatic when it comes to the average length of stay. Between 1985 and 2021, its duration has almost tripled from about five years to 13.2 years.
It makes sense when you think about it. Is now the right time to move?
Approximately 95 percent of homeowners have 30-year, fixed-rate mortgages. In the last five years, everyone who took out a loan has had a rate below 4%. What is the point of paying off such a loan voluntarily?
There are fewer and fewer people who are doing so, as we have seen.
It is interesting to note that the same thing is happening in the rental market as well.
A record number of tenants are renewing their leases. According to RealPage, over 65% of tenants renewed their leases in April of 2022 compared to just over 56% in April of 2019.
It also makes sense if you understand that the large rent increases you hear about are just for new listings. When the year-over-year rent increase for new listings was 16.9% in April, NPR found that the average tenant was only paying 4.8% more.
It is because very few landlords are willing to raise rents on current tenants to market rates. If the rent is increased more than 5%, tenants often leave just out of spite. As a result, if rent is (or was) going up 16.9% elsewhere, but only 4.8% where you are, you’re likely to stay put.
Is the United States, born in a struggle against monarchy and aristocracy, regressing to the realm of feudal serfs?
Well, for the time being, sort of.
There Are Opportunities In This Unlikely Market
The Homeowner That Rents
As long as interest rates are high (at least compared to pre-2008 crash levels), the “sellers strike” will continue to boost the housing market. Nevertheless, many homeowners who need to relocate are choosing to rent out their homes instead of selling them, resulting in a higher volume of rentals.
Rents are starting to moderate. In April, they increased 18% year-over-year, but now they are only 7.4% higher in November and 1.2% higher than in October.
Rents are still quite high, so landlords should be able to hold rentals for a while longer.
Additionally, for any homeowner who needs to move due to a job relocation or other reasons, it is probably best to rent your current home and then find a new rental. The softening rental market will help you find a rental as much as it hurts you in renting out your current apartment.
Again, why pay off your old 2.65% loan to get a new 6.95% loan? There is not much profit to be made from that kind of arbitrage.
There is a good chance that the “homeowner who rents” will become more common in the coming years. The “normal” homeowner probably won’t think of such ideas naturally, despite the fact that they are in their best financial interest.
We move on to the next major opportunity, which is infamously known as the “subject to” strategy.
“Subject to” simply means that the purchase is “subject to existing financing.” In other words, the buyer assumes a loan that cannot be assumed.
In other words, the buyer takes title to the property and pays the loan, but the loan remains with the seller.
Clearly, the buyer benefits in this case. How much does the purchase price matter if you can “assume” a loan at 2.85%?
However, there are several problems. You must build rapport with the seller before you can trust them to pay their mortgage on a house they no longer own. It’s the seller’s credit that will suffer if you don’t make the payments.
Second, most mortgages and deeds of trust include a “due on sale” provision. Banks can call a loan due when a property transfers ownership. Historically, banks have rarely done this. This time, however, it might be different. In an environment where the going rate is over 6%, would a bank keep a mortgage at 3% on its books?
The only thing we can say with certainty is that we don’t know. You should have a plan B if the bank decides to call the loan due if you employ this strategy.
Furthermore, a mortgage without a corresponding property will seriously affect a seller’s debt-to-income ratio and make buying a new home very difficult. In addition, as a potential buyer, you would never want to pay off any mortgage made between 2018 and 2022. Thus, the early 2010s were a time when subject to’s weren’t as popular, so there may be a long-term conflict and possibly an ethical issue.
In spite of the fact that you may not have a fiduciary duty to the seller, you should be clear about what the consequences could be up front. Ideally, you should come to an agreement about how long you will keep that mortgage before refinancing or selling it.
In the meantime, the “sellers strike” should continue if rates remain high. For the foreseeable future, new listings are expected to be very low. There will be a slight softening and decline in the real estate market, but without strong incentives to sell, the sellers strike, among other factors, should keep it afloat.
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