The Last Straw, Inflation
October 19th, 2005After nearly a dozen increases in cost of funds by the Federal Reserve, and Alan Greenspan the past 20 months, inflation raises its ugly head. The cost of energy, and the impact of 2 devastating hurricanes are driving prices up. That includes 30 year mortgage rates which have settled above 6% for 2 weeks in a row for the first time this year.
With the latest report of core inflation increasing there is no doubt the Fed will continue increasing short term rates through the end of the year. Could this be the straw that breaks the back of the housing boom? I believe so.
Let’s look at the previous straws placed upon the back of the real estate market. Three consecutive years of record sales. The largest number of homeowners in history. This adds up to satisfied demand. Can anyone please tell me where you can find a housing market that has pent up demand? Not counting flipping markets in Florida, Arizona, and the Left coast?
The impact of the Fed’s rate increases hasn’t impacted long term mortgage rates, yet. The impact has been on other household debt, such as credit card debt. This decreases the disposable income that could be put towards a home purchase. Add to the increased payments for retail debt, the cost of gasoline, and the predicted 30% to 50% increase in cost to heat a home for the winter, and it all adds up to severely diminish the disposable incomes of many a prospective home purchaser.
In some markets the tables are turning to favor buyers instead of the sellers. The Springfield IL. market is a good example. While sales of homes are at record levels the past 3 years, sales are flat. Sales of homes in 2004 beat 2003 by a total of 5. That’s right by 5, of 3660 closed home sales. This year is barely 2% ahead of 2004 YTD.
While sales are flat the same is not true for the number of homes for sale, up a whopping 34% from just 2 years ago October. At the current rate of sales, and the rate of new home listings, only 1 in 3 area home sellers will get sold before March 31, 2006. That is if we can maintain the record pace of (flat) sales.
It will probably take a long lonely winter for the unsuccessful home seller to realize the market has changed. These are the sellers that will see their sale price drop significantly due to time on the market combined with the diminishing numbers of buyers in the market with diminished purchasing power.
The first groups of sellers that will be impacted will be for sale by owners, those listed with limited service companies, and those listed with discount brokers. Their chances of selling will plummet with weakening demand and rising interest rates.
Home builders will be severely impacted because they have fixed costs in their homes, and don’t have the luxury of a homeowner with built up equity. With dozens of builders spec homes sitting unsold, now for months in many cases, many builders will pull in their horns and return to contract building. Most builders will sit all winter paying their lender interest, rather than lowering the asking price and enhancing their chances for a sale this winter. If rates continue upward further diminishing the purchasing power, and the number of buyers in the market, many builders will suffer significant losses in the Spring.
Yes I believe the latest report on inflation will be the straw that breaks the back of the boom market, because Greenspan and the Fed will continue raising rates. Will the real estate market go bust? No. Sales will slow, and prices will drop as we return to normal market conditions. It will only seem like a bust, as the market returns to ‘normal’. Normal sure will seem slow to many in the industry. At any rate, I sure enjoyed the ride. Good luck to you in your market.
