A few times a year, the Chief Economist for the National Association of Realtors ® prepares an economic review for Realtors ®. The report was aired on Zoom August 2nd.

He does a really good job, especially because there are so many of us, and we have such a variety of backgrounds. He is accessible, and that’s no easy task.

The headline – as one would expect – is the interest rates.

Mortgage interest rates are set by the Federal Reserve. The base lending rate went up one quarter of a percent last time. That was based on the political wrangling about the budget deficit. The base interest rate had been zero during the pandemic recovery period, so what we are seeing now is in reaction to that. But realizing that doesn’t make our clients feel any better.

Since March 2022, we are seeing the highest interest rates in a generation. This is not good news for homeowners who are looking to make a change. Anyone who owned before 2021 is likely to have a low-interest mortgage – about 3%. If they attempt to get a mortgage now, they will be paying something more like 7 or 7.5%. This is a big difference and it cuts everyone’s buying power. People who bought “starter homes” are stuck; they cannot afford that “forever home” at this interest rate. Meanwhile, people who own “forever homes” have equity, but may still need to borrow to purchase a smaller, more manageable retirement property. This is part of, but not all of, the reason there are so few houses on the market.

Another factor in the overall economic picture – which will haunt us as time goes on – is that the tax cuts from the previous administration reduced Federal revenue. This will affect our national debt.

Prediction by Lawrence Yun: Next Fed action is in September. Dr. Yun expects interest rates to be level or maybe a little lower.

Well, not likely. One of the members of the Federal Reserve Board (they are called Governors) is speaking publicly about the likelihood of further increases. That was on August 5th. 

Gross Domestic Product

Gross domestic product (GDP) is an indicator of how much the American economy is producing. Overall, GDP is sluggish. Residential housing investment is a big part of the GDP and that is way lower this year. Housing investment peaked in 2021. There has been a housing recession since Q2 of 2021. That recession peaked in Q3 of 2022. We are now in recovery. This will improve the overall Gross Domestic Product. The real estate sector drives business in many areas, like construction and the production of larger consumer goods.

Inflation

Typical inflation is 2% a year. The Covid stimulus caused inflation. That stimulus ended this spring and there was more inflation. It was up to over 8% in May 2022. It has been going down since, and is now almost normal now. This is why Dr. Yun thought interest rate hikes would end.

Housing inflation:

Rent:

Nationally, rent is up 8.3%. Usually, rents increase 2-4% a year. Rental property construction is up, so rental inflation should slow down.

Purchase market:

Seasonally adjusted market volume is down 23% from last year. This is still below preCovid levels. Market volume is how many properties are changing hands.

Existing homes for sales remain low. Normally, there are 2M homes for sale – nationally at this time of year — now there are 1M.

Big builders are building and selling new properties. New construction back to preCovid levels. This is less relevant to places like greater Boston, where there is a slower level of building; we have a land shortage.

Home prices are down 1% nationwide – this year.  Massachusetts prices are still going up. We are up 32% since Covid, 7% since this time last year. Lucky us!?

Foreclosure activity is not a factor.

Because of the price inflation on homes, owners have enough equity in their properties. If they cannot pay the mortgage, they can sell for a profit and avoid foreclosure. American foreclosure rate is about 2% now, which is very low.

The bidding war landscape, nationally:

The lack of inventory is creating 3+ offers per home – national average. This is less than last year. However, in a typical year, the nationwide average is 2.4 offers per house.

18% of market is non-primary residence buyer. (Investors)

All-cash buyers are 25%+ of the market. This remains higher than pre-2020 levels. It was in the high teens before the pandemic.

Generational data:

The median age for first-time buyers is now 36. Repeat buyers median age is 59. This is a generational change. In 1981 repeat buyer’s median age was 36. Why? The millennial generation lost the opportunity to grow housing wealth during the 2008 recession, so they are less able to trade up. The overall rate of buyers under 35 is going up, however, there was a higher percentage of young buyers in the past.

This created an unusual situation: Millennials are not the largest group of buyers. They should be! It’s Boomers — who have more wealth – who are buying. Boomers are moving in large numbers. They are not “downsizing.” They are buying properties that are not necessarily smaller or cheaper than where they were.

Multigenerational homebuyers make up 14% of the market. There is a market for the family compound. This would seem like a good way to fulfill the needs of Boomers who want quality housing AND create a living situation for Millennials that has comfort and value.