Housing market storm warnings

The homeownership dream is quickly becoming a mirage

By Raphael Barta
Reader Contributor

As we head into 2022, everyone from housing analysts, mortgage lenders, real estate agents, buyers and sellers are wondering: When will there be a return to “normal”? Terms like “unprecedented” are frequently used to describe what has been happening in the market, but after several years of consistently rising prices and low inventory, guess what: This is normal, and there’s no imminent correction. The factors that have come together to create the current market scenario did not happen overnight, this has been years in the making. If you walk 20 miles into the forest, you can’t walk out in five. 

Raphael Barta.

There have been quite a few excellent articles over the past couple years in the various local media about the housing market in Bonner County. It is definitely on everyone’s mind, from the retail store clerk desperately trying to hang on as a resident here, to the prospective resident viewing listings on Zillow from their California residence. The market has been analyzed from many different perspectives, and a Sandpoint Mayor’s Task Force has been trying to come up with solutions for the affordability challenge. But so far, the overwhelming power of this tidal wave has moved forward defying all the good intentions and discussions. 

For the foreseeable future, the low levels of inventory will remain as the driving factor that keeps prices artificially high. In the Sandpoint area right now, there are about 1,000 units in the planning pipeline, although it remains to be seen how many of these will get built and when. There are still major challenges in securing the material, components and labor for new construction. 

Historically low mortgage rates over the past three years helped fuel the explosion in home prices, but perhaps this factor is about to turn. As of Jan. 11 mortgage rates rose to their highest level since May 2020. The average rate for a 30-year fixed rate loan is now 3.6%. A year ago, it was 2.65%.

As inventories stubbornly stayed low, intense buyer demand pushed up pricing. Still low by historical standards, rising mortgage rates do not seem to be affecting the residential market —  yet. Existing home sales in 2021 had the best year since the 2006 boom days, and that is despite a rise in the median sale price of 20% year over year. 

The Federal Reserve has said it is going to raise short-term interest rates this year. As mortgage rates track those increases, this will result in an even greater challenge for home affordability. As interest rates rise, existing homeowners will be less motivated to sell their current homes if they have a mortgage at favorable rates, as they are locked into the recent years’ low rates. Economists think that once rates hit 4%, this “locked-in effect” will become even more pronounced. This trend only makes the inventory situation worse. 

Continuing supply chain problems are slowing the development of new homes. The pandemic closure of factories, transportation bottlenecks especially in the trucking industry, and shipping port capacity limits have created huge challenges to completing new home construction. Basic items like windows, garage doors, appliances and even paint are in short supply. Paint! Something we think of as a commodity: Just go to a paint store and pick up a gallon to update the living room this weekend. But apparently the supply of the resin and other inputs have been severely disrupted (beginning to hate that word) and now paint store shelves sit empty and buyers are moving into new homes with bare drywall. 

It seems 2022 will be characterized by shortages: housing inventory, workers, toilet paper, paint and, eventually, patience. We all want our lives back. The third wave of COVID (omicron as of this writing but by the time this article goes to print, we could be on to the next variation) and work-from-home and the general restlessness in the population (“Hey, let’s all move to North Idaho!”) is wearing us out. 

Investors, both individuals and very large corporations, have been quite active over the past 10 years in acquiring a significant proportion of homes that would have been first-time buyer homes. Investors predominantly buy with cash so have a distinct advantage over first-time buyers. The investors focus was at first the most affordable homes because these showed the best return as rents remained firm. These rental properties rarely come back on the market because their returns are so good — in the 8% to 10% range — especially attractive in the low-interest rate environment other assets have generated over the past several years (the U.S. Treasury 10-year bond pays 1.5%).

As the supply of lower-priced homes dwindled, the potential first-time buyers became renters. The monthly rent they now had to pay would have bought a lot of house, if only they could find one: S monthly rent of $1,500 at current mortgage rates would support a home purchase of $400,000 — but there aren’t any in that price range. 

So the homeownership dream is quickly becoming a mirage, and if you have ever been in the desert and hiked towards a shimmering lake in the distance only to have it constantly recede, you have an idea of this current market.

Raphael Barta is an associate broker with an active practice in residential, vacant land, and commercial/investment properties. [email protected]

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