What lower inflation and the Fed drop means for the Real Estate Market - Echo Fine Properties Artboard 1? alert-icon? Artboard 1? ? ? delete-icon? edit-icon? email-icon hide-hover-icon? Artboard 1? login-icon-white Artboard 1? next-icon-left next-icon-right-left next-icon-left-ochre next-icon next-icon-right-grey next-icon-right-ochre plus-with-circle-iconP search-fw-icon? search-icon-ochre search-icon-white
What lower inflation and the Fed drop means for the Real Estate Market
Echo Fine Properties

20 SEP

Finance | Jeff's Journal | Market Updates & Statistics | Real Estate Tips

What lower inflation and the Fed drop means for the Real Estate Market

First Things First. The NY Times and the Athletic did an investigatory story on my White Sox this week chronicling what is nearly certain to be the worst team in the 124 years of Major League Baseball. They interviewed 40 members of the organization. You can read the article here if you are a baseball fan. At 36-118, we are just 3 games away from the title of worst team ever. I became so disgusted, that I sent a rant to MLB Commissioner Robert D Manfred JR, which you can read here.  I feel like hitting my head on the ceiling and being knocked out of my misery.  And speaking of being knocked out, on to todays, JJ……

Uncle Allan

What lower inflation and the Fed drop means for the Real Estate Market

 

Everyone has an Uncle Buck. UB, the movie character was played by John Candy in the John Hughes classic that also featured Macaulay Culkin’s film debut.  My Uncle Buck is Uncle Allan. Uncle Allan was a pretty good Uncle growing up. Like Uncle Buck, UA loved the horses. He frequently brought me to Chicago’s natural history museum, aquarium, and planetarium. One day when I must’ve been five or six, UA got me a trampoline. I was so excited. UA set it up downstairs in the basement.

Uncle Allan is a graduate of Northwestern, a lawyer, and well read.  None of that mattered when it came to trampolines. Folks, never buy a trampoline for youngsters and set it up in a room with 8-foot ceilings.  I know from experience! Next thing I know I woke up in Highland Park hospital. I guess the concussion explains a lot and I thank UA when my wife gets mad for me forgetting to pick up whatever she asked me to. A lifetime excuse! See I already forgot. Thanks UA.

Uncle Allan also proved that when things go up, they must go down. Which brings me to interest rates.  Inflation two and half years ago ballooned to 9.1%. Inflation recently dropped to 2.5%.  It fairly quickly dropped to 3.3% but it took well over a year to tame it to the mid twos.  With the labor market slowing and a soft landing in sight, the Fed finally lowered the borrowing rates this week to by .05%. You can view all statistics for all counties here.

Some Realtors are saying the market is going to soar.  Me, I’m more like this is “Steady Eddy” good news.  I was interviewed by the Palm Beach Post on the matter this week which you can read in full here. There is a lot to breakdown so get out of bed, grab a bagel, some bacon, and hot cup of black Sunday Joe, and we will get at it!

If this happened a year ago, then I think a soaring market with 10% price increases could have occurred. The reason was inventory a year ago was super low. Inventory now has vastly increased today. Let’s go over the August numbers as the numbers tell the story. Note that St. Lucie and Martin counties are somewhat similar.

Closed sales of single-family homes in Palm Beach County dropped 10.9% from year to year.  A 19.5% drop  in the Town/house condo market. Prices stayed about the same year to year (figure a bit of a loss if you include inflation). The big story is inventory.  Last August there were 3,405 single family homes on the market. Today, it’s 5,257, a 54.4% increase. There were 2.9 months of inventory on the market then. Now there are 4.7 months of inventory available.  4.7 months is a healthy market. The townhouse/condo market is another story though. Inventory has skyrocketed by 77.2% from 3,458 to 6,288 active listings. Months of inventory jumped from 3.6 months of inventory to 7.1 months. * Major asterisk – Condos and townhomes are lumped together. I’d be willing to be my first born, Sam, that condo numbers are make up the bulk of the increase versus townhouses.  Much of it is skewing to condos that are older than 25 years and have not had their assessments complete. The good news on the condo front is by the end of the year, the assessments and repairs will be a known quantity and much of this will start to reverse itself.  I wrote about what would happen as a result of Florida Bill SB-4D a few years back.

The other reason that market prices shouldn’t soar is that while interest rates have dropped significantly they aren’t going down so fast. Buyers and much of the public want to believe that mortgage rates are directly tied to the FED borrowing rate but that is not the case.  They mean something indirectly but not everything. Inflation, the Feds purchasing/selling position, and the marketplace are just some of the factors that set the 10-year treasury yield. In the case of interest rates, they actually went up on Wednesday slightly after the Fed lowered borrowing rates. The drop of current rates was already baked in by the marketplace. Ryan Brown, the mortgage broker I talk to most told me this six weeks ago.

Correspondingly, inventory is not going down so fast. We have shadow inventory now. Sellers who want to sell (but haven’t put their home on the market) have been waiting for inventory to curb. They are going to end up replacing sold inventory or get tired of waiting and just put their home on the market. I’ve heard lots of this over the summer. And a new category which are “accidental landlords”. These are folks who had a 3% interest rate and held onto their home rather than selling them. Since they are not homesteaded, the year over year 10% property tax increases catch up to their higher equity stakes in the home. Increased costs and one more hollering phone call at 8:45pm that the microwave is not working from the irate tenant who was set off by his cold soup will make most of them cry Uncle Allan! Same with insurance and homeowners’ association costs. We homeowners are all thrilled to have more equity in our homes but don’t like paying the costs associated with it. If your home jumps in value from $650,000 to $1,000,000 the taxes and replacement value go up with it. In this case what goes up brings lots (taxes, insurance, HOA, usage of money) up along with it.

Short term, we should see a slow drip (not guaranteed) in interest rates dropping. An FHA loan as of writing this should be at 5.75% and conventional around 6.25%. Remember though, you have to have mortgage insurance (PMI) with FHA/VA plus more restrictions. The PMI equalizes or is more costly than conventional in most cases. The experts I’m talking to see another ½% drop-in interest rates if everything in the world remains steady through 2025.  However, it’s all-good news. A $500,000 mortgage at 7.5% compared to 6.25% gives a buyer an extra $80,000 in purchasing power. For an FHA/VA buyer, an additional $130,000.  That difference brings a lot of Buyers into play. I think the magic number is 5.5%.  With points and seller concessions, we are seeing rates already in the 4% range.

What we will see is a bump in activity. As the gap in interest rates has narrowed, it gives sellers permission to move on with their lives and for buyers to finally get back into the market. There are a lot of pent-up buyers and sellers. Remember as well, there is no more land to build on in prime Palm Beach County and major population growth coming. This will keep prices from dropping, which is what has happened over the past few years despite historic low purchasing.

If you are a cash buyer or investor, the best time to purchase is now. The reason is that you are going to start to get more and more competition over time from Buyers who now will be competing with you on a home.  That hasn’t been the case for a long time. Cash Buyers – This is your bottom!

Expect prices in some categories to slightly go up and in areas of hyper inventory (older condos) to be steadier or slightly down based on condition. Overall sales activity going up is a great thing. More activity begets more activity. People in the wealthiest communities told me a few years ago, that the rise in interest rate wouldn’t affect them because all of their buyers were cash. My response was yes, that with all cash buyers this was true. However, the buyer of the cash buyer’s house might need a mortgage. If their home up north doesn’t sell then they won’t have the cash to buy your home. That is exactly what happened and why activity has been slow across the board. The Fed wanted to halt residential sales to curb inflation and mission accomplished. Buyer sales from mortgages result in more trickle up economics and help drive much of the marketplace up and down.  In conclusion, by this time next year, the big story will be nice steady sales with consistent increase of activity. Not enough of a jump to give you a concussion though.

 

Find your next Florida home:

Search by popular community area

Search by lifestyle

Search by subdivision

Search by price

Search by rental

Search the commercial MLS

Jeff Lichtenstein, originally from Chicago, got his start in the home furnishings textile business where he traveled over 35 weeks a year selling fabrics. After the family business was sold, Jeff moved to Florida and became a real estate agent. Today he is the owner and broker of Echo Fine Properties, a luxury residential brokerage voted best brokerage of the year. Jeff manages a non-traditional model of real estate that mimics a traditional business model. Echo has 80 agents, an average of one million dollars per transaction and over 500 million in annual sales. Between traveling for work and annual family trips to national parks with his wife and 2 now adult children, Jeff has visited 49 states. He is also one of the few Chicago White Sox fans you’ll ever meet.  Some publications he has been quoted in.

Author of business & leadership book How Making a Sandwich Can Change Your World –  The Amazing Success of the PB&J Strategy – Available to Buy Now!

Feel free to ask him a question directly at jeff@EchoFineProperties.com including a complementary  valuation of your home.

Back to Palm Beach Blog
OPEN HOUSE

View All Open Houses


Your Soulmate in Real Estate™

Looking for a Perfect Community to live?

Take our step by step quiz to find a best matching community for you*.

* Patent Pending

Language Test