January 16, 2024 – Will Sellers Come Out and Play?

Economic Commentary

It seems to be a little early to be speaking about spring, since it is the middle of January. However, in the real estate sector, we never know when the spring market will emerge and how strong it will be. Most of the forecasts point towards a better year for the real estate market, but only marginally better than 2023. But the real determinate of how strong and early the spring will be will not be prognosticators. It will be the sellers.

Last year was all about the lock-in effect. The lock-in effect describes sellers sitting on low interest rate mortgage loans and not selling their homes because their next home would be financed at a much higher rate. Mortgage rates have come down from their highs of last fall, but most believe that rates have not moved enough to motivate this latent demand of sellers. Thus, most are predicting marginal gains in the market as sellers slowly come to the table.

On the other hand, life goes on. Baby boomers, many of whom own their homes without a mortgage, are getting older and many will need to make their final move. As a matter of fact, recent numbers show that close to 40 percent of homeowners do not have a mortgage. These owners are not restricted by interest rates because they are not likely to finance their next home if they are to purchase again. Thus, the lock-in effect may not be as strong as it may seem. The bottom line? The more sellers who come to the party, the earlier and stronger the spring market may become.

Weekly Interest Rate Overview

The Markets. Mortgage rates continued to move slightly upward in the past week. There was much volatility after the consumer inflation report was released on Thursday – after the survey ended. For the week ending January 11, 30-year fixed rates rose 6.66% from 6.62% the week before. In addition, 15-year loans decreased to 5.87%. A year ago, 30-year fixed rates averaged 6.33%, less than 0.50% lower than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “Mortgage rates have not moved materially over the last three weeks and remain in the mid-six percent range, which has marginally increased homebuyer demand. Even this slight uptick in demand, combined with inventory that remains tight, continues to cause prices to rise faster than incomes, meaning affordability remains a major headwind for buyers. Potential homebuyers should look closely at existing state and local resources, such as down payment assistance programs, which can considerably help defray closing costs.”  Note: Rates indicated do not include fees and points and are provided for evidence of trends only. They should not be used for comparison purposes.

Real Estate News

The median age of owner-occupied homes is 40 years, according to the latest data from the Census Bureau’s 2021 American Community Survey. The U.S. owner-occupied housing stock is aging rapidly especially after the Great Recession, as the residential construction continues to fall behind in the number of new homes built. With a lack of sufficient supply of new construction, the aging housing stock signals a growing remodeling market, as old structures need to add new amenities or repair/replace old components. Rising home prices also encourage homeowners to spend more on home improvement. Over the long run, the aging of the housing stock implies that remodeling may grow faster than new construction. A little less than half of the owner-occupied homes was built before 1980, with around 35% built before 1970. New construction added nearly 8.3 million units to the national stock from 2010 to 2021, accounting for only 10% of owner-occupied housing stock in 2021. Owner-occupied homes constructed between 2000 and 2009 make up 15% of the housing stock. Due to modest supply of housing construction, the share of new construction built within the past 11 years declined greatly, from 17% in 2011 to only 10% in 2021. Meanwhile, the share of housing stock at least 42 years old experienced a significant increase over 10 years ago. The share in 2021 was 49% compared to 40% in 2011. Source: National Association of Home Builders

Bank of America housing analysts say that “underbuilding” of U.S. homes over the past decade has not only “absorbed the 2 to 3 million home glut from pre-financial crisis overbuilding” but has also created a “deficit of 4 million” U.S. homes. Simply put, the analysts say we went from an overbuilt nation to an underbuilt nation over the past decade “The most direct solution for the housing shortage problem is to build more homes,” wrote in a paper published late in 2023, which examined the markets that are—and aren’t—addressing the “deficit.” The paper Included an analysis looking at building permits issued as a share of the local population. Perhaps not surprisingly, the analysis found that major Sun Belt markets are adding housing units at the fastest clip, while many slow population growth markets in the Northeast and Midwest are lagging behind. Source: Fast Company

It doesn’t happen often, but every once in a while would-be buyers run across a house for sale that also comes with a tenant. Sometimes, the seller wants to holdover. Other times, a renter occupies the place and still has time left on their lease before they must skedaddle. Either way, the sale requires some special handling. When the seller wants to stay, they become your tenant and should be treated as such. That means a lease, or at least an agreement stating, among other things, their exact length of stay. There are good reasons sellers want to remain beyond closing. Perhaps they are moving to a new house that is still under construction and not ready for occupancy. Possibly the seller of their new place needs some extra time of their own, or maybe the seller hasn’t even found another house yet. There’s also a good reason why a buyer will allow a seller to stay on. Such an offer might sweeten the pot just enough for the seller to choose your offer over someone else’s. And if you offer to allow them to stay rent-free, your offer becomes even more attractive. Whatever the reasons, both buyers and sellers should tread lightly. And for the protection of each side, everything should be reduced to writing — perhaps with the help of a real estate attorney or at least that of an accomplished real estate professional. The deal’s term can be anywhere from a few weeks to two years. Anything longer than 60 days, the lender may consider the house an investment property that calls for a higher interest rate and more stringent terms. It’s an entirely different ballgame when the house you are buying is occupied by someone who still has time left on their lease. How you treat them will go a long way toward making your step into land-lording successful or not. If there is a written lease in place, you as the new landlord have to abide by it. That means you can’t raise the rent, you are responsible for major breakdowns and you must give proper notice that they’ll have to move out when the lease expires. If the tenant decides to become uncooperative, your foray into property management can be disastrous. In some places, it can take months to remove a tenant. So, tread lightly. The key is to maintain an open line of communication. “The best approach,” advises Eric Michael, an agent with Remerica Integrity in Northville, Michigan, “is to make sure that everyone is on the same page.” Source: Lew Sichelman, The Housing Scene by UExpress