US Housing Market Update: Prices Surge Amidst Mortgage Rate Hike and CRE Challenges

US Housing Market Update: Prices Surge Amidst Mortgage Rate Hike and CRE Challenges

BY: Kristen Riffle September 26, 2023

Photo Courtesy of:  The Kobeissi Letter

The latest Case-Shiller data has just been released, shedding light on the current state of the US housing market. In July alone, home prices in the United States experienced a notable increase of 0.9%, a trend that has persisted for the past five months. This surge in home prices is particularly significant considering the backdrop of mortgage rates, which have climbed to 7.5%, the highest level seen since 2000.

Despite the daunting mortgage rates, the housing market continues to thrive. Year-to-date figures reveal that home prices have risen by an impressive 5.3%, surpassing the national median full-year average. However, it's important to note that this flourishing housing market comes at a time when existing home sales have plummeted to levels not seen since 2010.

Perhaps the most striking statistic in the current housing landscape is the fact that homes are now, on average, a staggering 44% more expensive across the nation than they were before the onset of the pandemic. This revelation, sourced from Redfin, underscores the robust demand for housing and the limited supply that has driven up prices to such heights.

Meanwhile, amidst the housing market's resilience, there exists a stark contrast in the commercial real estate (CRE) sector. Alarming data suggests that nearly 700 US banks now exceed the 2006 Commercial Real Estate Loan Concentration Guidance established by the FDIC. This guidance outlines the permissible exposure that small banks can have to CRE loans.

Photo Courtesy of:  The Kobeissi Letter

At present, small banks hold a substantial 70% of CRE loans, totaling a massive $2 trillion. Furthermore, an impending challenge looms on the horizon, as $1.5 trillion worth of these CRE loans are set to be refinanced at significantly higher rates. This situation unfolds in an environment where office vacancies have reached record highs.

It's essential to recognize that the Consumer Price Index (CPI) reveals housing as the largest contributor to overall costs, making up a substantial 32.7% of the total, almost one-third of the inflationary basket. This highlights the pivotal role of housing expenses in shaping the inflation landscape. Additionally, the Producer Price Index (PPI) for real estate services, a subset of the broader PPI, provides valuable insights into the pricing dynamics within the real estate sector. In August 2023, the PPI for real estate services accounted for 17.6% of the overall PPI, further emphasizing the sector's significance in the broader economic context.

So, what implications does this hold for future inflation trends and potential rate hikes? The high weighting of housing costs in the CPI suggests that any significant changes in real estate prices, such as the surging home prices we've seen recently, can exert considerable upward pressure on overall inflation. This, in turn, may prompt central banks to consider tighter monetary policies, including interest rate hikes, as a measure to control inflation. As the real estate sector continues to play a substantial role in both CPI and PPI, its performance and pricing dynamics will remain a critical factor to monitor in gauging the trajectory of inflation and the future stance of monetary policy.

The current move of buyers is towards new home sales, in my humble opinion, although it's essential to clarify that this is not financial advice. According to Zonda's builder survey, the luxury market buyer pool has experienced a substantial contraction, shrinking by a staggering 90%. This shift in buyer dynamics is the driving force behind the prevalent trend of builders and sellers offering substantial incentives and displaying a greater willingness to negotiate with real estate agents. As a result, many clients are benefiting from significant price reductions in their property transactions. Builders are even going to great lengths, such as buying down interest rates, in an effort to attract buyers. However, it can be challenging to get this message across effectively when some potential buyers have seemingly hit the brakes on their real estate endeavors.

In the ever-evolving real estate landscape, opportunities are abound. Whether you're considering selling your home in a low inventory market, where buyers are still keen, especially if you made your purchase pre-pandemic and may be sitting on substantial equity gains, or you're in the market for a new home, where I've successfully negotiated for nearly everything under the sun – it's all within reach. In the world of real estate, it's not without its challenges, but that's what makes it exciting. If you're ready to explore your options and embark on your real estate journey, don't hesitate to reach out to me. Let's discuss your goals, aspirations, and how I can make them a reality. Your next move starts with a conversation. Contact me today, and let's make it happen!

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