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Low Housing Inventory Is Frustrating Would Be Buyers

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Terry Story, Low Housing Inventory

With Terry Story, 28-year veteran Real Estate Agent with Coldwell Banker in Boca Raton, FL

Low Housing Inventory in 2017 Causes Market Gears to Grind to a Near Halt

Steve and Terry have been talking for years about how the low inventory of homes available for purchase is affecting prices, demand, and rents. They pick up this topic again, focusing today on the reluctance of home sellers to move.  Many homeowners want to sell but, just like the would-be buyers, they have few good options on where to move.  They look at some of the underlying issues feeding the current holding pattern the market is stuck in.

Fewer Home Sales Means Less Money for Local Economies

Terry believes the stalemate is causing a drag on the economy and not just for real estate brokers like herself, though it’s true that more sales would help her industry.  Backing this up, she notes that the average real estate transaction generates about $75,000 in revenue, which is shared among real estate agents, attorneys, title companies, movers, painters, etc.  Money trickles down into various ancillary activities and, all told, home sales and purchases are a huge boon to the economy.  The problem, the reason the market is somewhat stuck in the mud, is that sellers, by necessity, are also buyers, and they aren’t finding places they can afford or want to move into.  This deadlock is not a result of buyers lacking clarity on what they’re looking for, and it’s not for lack of trying.  In many cases, especially for young families seeking more space, it is an affordability problem, even with low-interest rates.  Older homeowners want to scale back but simply aren’t finding desirable properties listed on the market.

Buying Home vs Renting: Has Line Been Crossed?

Changing gears, Steve observes that there are tons of rental properties being built in Southeast Florida, thousands of new units.  He also notes that rents are shooting up quickly and speculates that we may have crossed the line, at least locally (South Florida), where buying is cheaper than renting.  Terry agrees and trots out some simple numbers to make that case.  If you’re paying $1400 a month in rent, she points out that this is roughly equivalent to a mortgage payment on a $290,000 home.  Given that median home prices are around $190,000, that $1400 rent you’re paying can cover a much larger than average mortgage payment.

Steve says this math makes sense to him but it doesn’t explain why demand in so strong for rental property.  Terry admits she hasn’t figured this out either.  She says that single family homes for rent are extremely scarce and that could be one driver for higher rents and new income property construction.  Even so, she’s flummoxed by how expensive these new luxury rental units are: the majority go for between $3000 and $5000 a month.   Steve believes that these soaring costs can be attributed to some degree to the issue of would-be buyers having no one to buy from.  He wonders if demographic changes might finally break the vicious cycle: maybe aging baby boomers will become willing to relocate, moving out of denser areas into places with more availability, and, in the process, free up real estate markets in cities.

Rising Interest Rates Could Modestly Hurt Home Prices

Steve and Terry take a quick detour onto the topic of interest rates.  A reader of the Real Estate Survival Guide asks when will mortgage rates rise and what happens when they do.   The first part of the question is basically unanswerable as no one knows for sure.  Steve notes that many have been looking for higher rates for the past several years but, so far, that hasn’t come to pass.  Looking at a purely hypothetical scenario where rates go up 0.6%, however, Goldman Sachs estimates that home prices would drop 2-3%.  This estimate jibes with Goldman’s forecast that home prices will continue to rise over the next few years, albeit at a slower rate; therefore, they expect interest rates to essentially flatten out.  Terry doesn’t see slightly higher rates dampening people’s appetite to buy or lowering their bid offers.  She’s convinced that any rise in interest rates will primarily motivate would-be home buyers to get off the fence, joining the throngs of people trying to buy a home in an extremely crowded market.


Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital.  Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions.  Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances.  The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.

Read The Entire Transcript Here

Steve Pomeranz: It’s time for Real Estate Round-Up.  This is the time every single week, we get together with noted real estate agent Terry Story.  Terry is a 28-year veteran with Coldwell Banker, located in Boca Raton, Florida.  Welcome back to the show, Terry.

Terry Story: Thanks for having me, Steve.

Steve Pomeranz: So there are a lot of people out there looking to buy homes, but there aren’t a lot of homes for sale. This has been a meme we’ve been pursuing for many many years.  Homeowners are not moving, why are they not moving, we gotta get them to move!

Terry Story: I know, it’s affecting my lifestyle.

Steve Pomeranz: [LAUGH]

Terry Story: It’s actually creating a drag on the economy.  And I know this is gonna sound silly, it’s gonna be fewer commissions for real estate brokers, and an extremely competitive market for the first-time home buyers.

What I mean by that, Steve, if you think about it…I think I had read someplace, that the average real estate transaction creates about $75,000 or more in revenue.  So you’re paying real estate agents, your title companies, attorneys.  All of that turns into, once a home is purchased, there’s movers involved, there’s painters, there’s furniture. So it is a huge segment of our economy.

Steve Pomeranz: It all trickles down, I mean, whether to the Home Depot, to all of these places.

Terry Story: Absolutely.

Steve Pomeranz: Very good for the economy, housing is extremely good for the economy.  Maybe it’s one of the major reasons why the economy is growing, still, so anemically.

Now you know, back in 2008, when we talked about this, in 2006 and 2007, after the real estate crisis, or during it…we understood that homes weren’t moving because people were underwater. They owed more than their equity, and so they couldn’t move.  But that’s-

Terry Story: Well, they lost their jobs, or they’re in foreclosure. And the tenure of moving was from three and a half years, back in 2008.  Now it’s almost nine years, so people are staying put.  But the reason why they’re staying put, that we’re seeing then, than what we’d seen in the past, is primarily because they have no place to move to.

Now if you think about it if a seller then becomes a buyer.  So if there’s no inventory out there, and I see it first-hand, Steve.  I’ll go and I’ll meet with people, they’re sellers, they wanna sell their home.  But when they take a look at what’s out there, they’re like, yeah, no, I think my house is, I think I’m just gonna stay put, and-

Steve Pomeranz: [CROSSTALK] gonna have to do, yeah.

Terry Story: So it’s frustrating.

Steve Pomeranz: I mean, what are they looking for, are they looking for more space there?  I mean there’s gotta be an impetus to move.

Terry Story: Yeah, there does.  In a lot of cases, if it’s somebody that’s at the end of their career, they’re looking to scale down. If it’s a young family, they’re looking for more space.  In those scenarios, I find that those trying to move up, they’re finding it too expensive.  What happens when you move up, you also have…you’re taking on higher taxes, more expenses.  And as much as they desire it, they can’t afford it, even with the low-interest rates. And I think some people still have memories of what took place back in 2006.

Steve Pomeranz: I think I have a solution. I just read that a small Italian village in Italy is paying people to come and live there. That’s one thing, and I also read recently that, I forget how many castles. But the Italian government is offering Italian castles now for free to anyone that will come in and fix them up and spend the money to make them a tourist destination.

Terry Story: [LAUGH] I love it.

Steve Pomeranz: That’s it, so I don’t know if that’s buying up, buying down.  [LAUGH] I’m not really sure, but it is Italy, the food is really, really good, yeah.

All right, so here’s the other thing too, is that everywhere I look around in my neighborhood, and the area which I live…it’s all, there’s so many rental properties being built, hundreds and hundreds of units are entering the marketplace.  And rents themselves are going up very, very fast.
I think it’s a time now where the case may be made, it’s cheaper to buy than to rent.

Terry Story: Yeah, it is. I’ll give you a scenario, Steve.  The median rent in the US is about $1,400 a month.  Now if you’re able to spend $1,400 a month, that’s the equivalent of purchasing of a home of about $290,000.
So keep in mind that the median home value is $196,000.  So if you’re buying a house for $290,000, that’s more expensive than the median home.  So the rent is really up there.

Steve Pomeranz: Yeah, that’s a good way of explaining it.  When you compare apples to apples, it is definitely cheaper to own than to rent, and yet the demand for rentals is so high. Why do you think that is?

Terry Story: I haven’t quite figured it out.  I know, and I can only speak what I see in the local marketplace, and I know it’s gonna sound crazy, but to try to find something to rent in a single-family home is very, very tight.
Now I know in our marketplace, there’s a lot of new construction for rentals, but those places are very expensive.

Steve Pomeranz: They are.

Terry Story: Ridiculously expensive, $3,000, $5,000 a month, and it’s really out of control.  It’s defined as a single-family home for rent, and for what you get, it’s extremely high.

Steve Pomeranz: I guess it comes down to this same point, that if a renter’s gonna buy, who is he gonna buy from?  There’s a lack of sellers, so it’s this vicious cycle, something’s gotta break it.  And maybe it’s just the demographic shift.  As people get older, and they want to downsize, maybe they’ll move out of their area and move into other areas where there is more availability, and that will somehow free up the capital.  Now 37 of the 50 cities that Zillow analyzed, said renters could buy a home worth more than the median value of the home in the city without spending more on monthly housing, with the exception of San Francisco.

[LAUGH]

Terry Story: Yeah, San Francisco, boy.  Definitely, it’s cheaper to rent than it is to own a house there.

Steve Pomeranz: All right, final question, this is from the Real Estate Survival Guide.  The question was: when will mortgage rates rise, and what happens when they do?

Terry Story: Gosh, I wish I had that crystal ball.

Steve Pomeranz: [LAUGH] Well, we don’t know when, that’s for sure.

Terry Story: Yeah, well let’s paint a situation, a scenario.  So if mortgage rates surge 60 basis point…

Steve Pomeranz: That’s 0.6%.

Terry Story: Right, 0.6%, in theory, they believe it would lower house prices by 2 to 3%.  And this is an estimate, and this is from Goldman Sachs. This estimate thus supports the forecast that national housing prices will continue to rise but at a slower pace in the next few years.

Steve Pomeranz: From my side of the table, watching interest rates daily as I do, the expectations for higher interest rates have been now around for, maybe, three years?

Terry Story: Right.

Steve Pomeranz: And they haven’t.  They did rise from last year, after the election, but they’re starting to come down again.  And I don’t think mortgage rates really have moved all of that much.

Terry Story: No, and from my perspective, the way that I see it, if interest rates do rise, more people jump off the fence. And we have so many buyers right now, the demand for housing’s so strong.  It’s just gonna create more demand.  So I don’t think it’ll have that much of an impact, in the short run.

Steve Pomeranz: Okay, problems we can’t solve, but questions we can ask, and do our best.

My guest is Terry Story, this is our Real Estate Round-Up segment.  Terry is a 28-year veteran with Coldwell Banker, located in Boca Raton, Florida, and she can be found at terrystory.com.  Thanks, Terry.

Terry Story: Thanks for having me, Steve.

Terry Story is a weekly The Steve Pomeranz Show guest with her Real Estate Round-up and Survival Guide, sharing with you her insights as a 30-year Veteran Real Estate Agent.