Last week the Federal Reserve raised the interest rates by the third consecutive time by .75% basis points to reach 3.25% from 0% just a short time ago. This is consistent with what they have said they plan to do and is not the last rise expected this year. A similar rate increase is likely to happen again in November at the target rate for inflation is 4.4% in 2023. I believe we are beginning to see what Fed Chair Jerome Powell described as “some pain” for the economy in the coming months, especially for new construction home builders.
Home owner interest have risen to a whopping 7.62% for a conforming 30-year fixed loan as of Sept 26th! It’s a little cheaper to get an investor loan at 6.5% , but rates have really jumped even from a month ago (rate quotes from Umpqua Bank 9/26/22). The Case Shiller Index reported that the rise of home price values in 2022 is now on the decline after a 27% rise in the spring. Seattle area saw a 24% rise in home prices in 2021 and a 14% rise in 2020.
The cost of construction also continues to escalate up to 20% annually due to inflation, supply chain issues and labor shortage. It seems new construction builders could be left holding the hot potato. Already 1 in 5 builders have reported to the National Association of Builders that they have had to drop their sales price by an average of 5% this summer. Larger price drops are expected to continue this fall to move inventory. Real estate consulting firm John Burns RE Consulting is reporting that the rate of real estate contracts being cancelled has doubled since April 2022 up from 8%t to 17.6% in July 2022.
With interest rates at their highest since 2008, there is a clear slow down in national sales across every market. NWMLS data shows that members reported a drop of 24% in home sale activity from this past August to the last year total sales in August 2021. Every county except for Columbia saw a decline in pending sales this past month.
As markets begin to normalize and increased supply gives buyers more choices, sellers are having to adjust their expectations depending on their location to include longer wait times on market and price drops. Some areas still remain smoking hot, with multiple offers, albeit less of them.
With supply levels of housing now close to 2008 levels many are wondering when we see prices come down significantly. Affordability is still a main issue for buyers, and increased supply has not yet made it easier to afford, especially with higher finance costs. Some buyers have been waiting for big price drops but so far it has not happened. It may take many months before prices adjust significantly downward. Reuters recently reported that low supply and interest rates have inflated prices by as much as 40% during the pandemic.
The Federal Reserve policy now being adopted is to raise rates and keep them high through 2023 and 2024 or as long as it takes to bring down inflation. Some economists are pointing to a sustained slow-down period with signals that the Fed will not consider easing the rates until 2025.
If you are a buyer waiting for prices to drop, the higher rates and the end of the year will bring some prices down, however if you want bigger price breaks you might look ahead to 2023. The Greater Seattle Area is usually about 6 months behind the national curve. Our region’s strong economy makes us 1-2 standard deviations from the national market and we still have a plethora of cash buyers in the area.