Home Prices and Mortgage Rates

[squibber]

I hope this doesn't turn political but I am really curious because it affects my son.

Is there anything the government can do to bring down home prices and mortgage rates or are market forces too strong for the government to affect?

My son and fiance want to buy a house after they get married and my son stresses over the higher and higher home prices and mortgage rates.

[MightyGiants]

I hope this doesn't turn political but I am really curious because it affects my son.

Is there anything the government can do to bring down home prices and mortgage rates or are market forces too strong for the government to affect?

My son and fiance want to buy a house after they get married and my son stresses over the higher and higher home prices and mortgage rates.

The Fed cut interest rates by .5 percent last month, and more cuts are likely.  Unfortunately,  lower interest rates will only serve to raise home prices as the cost of mortgages drops, allowing people to bid more for homes.

The fundamental issue is that there is a housing shortage in the millions.  This is made worse by corporate interests that have purchased quite a few single family homes to turn them into rental properties.

At the end of the day, it's simply a matter of supply and demand. Either supply needs to increase or demand needs to decrease.   Things that would decrease home demand are less divorce, more marriage, fewer two-home families, and fewer corporate-owned homes.  Increasing supply can be more challenging.  There is only so much land available.  Many towns are not looking to increase residential property as it is the most costly to the community.  With the high school costs, residential properties tend to be service-heavy and tax-light compared to commercial and industrial properties.  So, it's not like many towns are actively looking to turn their open space into more residential units.

To circle back to the question at hand, laws could be passed in the form of tax deductions and the like that could encourage more home building.  State and Federal grants could offer some financial incentives to encourage more home-building in communities.   One thing I think could help is there are a lot of areas in cities and in the north that have sort of become ghost towns with tons of abandoned or unused properties.  Focus could be put on reinvigorating those areas as there is no need to consume precious open space in the process of creating more homes.


Sadly, another way home prices could drop is a serious economic downturn.  Outside of the Covid years, the economy has enjoyed pretty much good times since the big downturn of 2007-2008.   If we see a major downturn, it will more than likely be accompanied by a serious drop in home prices.

[Jolly Blue Giant]

Econ 101:

Prices are set by supply and demand. There comes a point in time where supply becomes greater than demand, called, "diminishing returns", and the trend flips downward

Demand increases when demand (population growth) grows faster than the supply can keep up

Supply of available money to purchase a mortgage (or anything on credit) is cast in stone, and is inflexible, even if demand is high. It's out of our hands

Interest rates are controlled by the Federal Reserve Bank (which is not a "federal" or government agency and is wholly independent). And again, "supply and demand" comes into play...this time "credit (demand)" and available money to loan (supply). The money supply depends on the "federal funds rate"...the federal funds rate is the target interest rate set by the Federal Reserve (board of directors) and announced publically by the chairman (who is appointed by the President and it is rarely along political lines). Banks are obligated to hold a certain amount cash/assets as a percentage of their current value (for non-accountants, "accounts receivable" is an asset like cash). When the Federal Reserve drops a quarter point, this puts additional money to loan at the hands of banks (and they are usually anxious to loan it out). When the Federal Reserve raises the rate, banks have to pull cash/assets back in to satisfy the federal fund rate (right now it's at 4.75-5.00%). When the rate was near zero a few years ago, interest rates were historically low, and you could get a mortgage for under 4%, and vice versa when the rate increases

Two things affect interest rates and money supply: fiscal policy and monetary policy

Fiscal policy: government controlled and is tied to spending, taxing, etc. Generally speaking, when the government releases a new fiscal policy, it could take a couple of years to see the effect due to bureaucracy and political shenanigans, and it is not uncommon for a fiscal policy to finally take affect, only to see the situation has already changed

Monetary policy: privately controlled by the Federal Reserve Board (which I point out again, is NOT a government agency), and when it was named by Pres. Woodrow Wilson, who privatized our currency and added the name "federal" to the name of the private organization so that people would think it was a federal program...it is not. Monetary policy determines the federal funds rate. Monetary policy has almost instant results, as compare to fiscal policy



On a more personal level, credit rates offered to you are determined by credit scores, credit reports, factors such as your income, length of the loan, etc

[Ed Vette]

The high interest rates have kept inventory low. Right now the Fall market is not as strong as the Spring Market would be because parents do not want to move their kids in the middle of a school year. Most sellers who have to mortgage to buy their next house are locked into a 3% or lower rate, so they are holding off on selling. The Presidential election is causing uncertainty so that is holding off sellers but regardless of who the next president is, that will change after the election. Eventually, the market will correct in a couple of years and the Seller's Market we are currently in will become balanced as interest rates drop below 5% or a normal range.

You would be surprised how many buyers are coming in with cash. Your son is up against that. I've had cash offers with every listing this year. I just listed a home for $835K and had a $900K offer but accepted a lower Cash Offer.

Your son should have a Realtor representing him, and that Realtor can suggest how to make his offer as strong as it can be without hurting him. With the new laws, he has to have a Buyer's Agreement in place with the realtor for the Realtor to show any property. If he wants to work with the Seller's Realtor in a Disclosed Dual Agency agreement, there are pros to that, and he still needs to sign an agreement. Right now Sellers in my market are still offering the Buyer's Broker at least 2.0% commissions, so in most cases he still won't have to pay the realtor's fee. Strong offers will be putting down 20%, so there would be no PMI (Premium Mortgage Insurance) and offering to bridge the appraisal price to the Listing price. Inspections can be offered to ask for only major Structural, Environmental, and mechanical issues. 

My suggestion would be to shop in a range he can afford to bid up the price in a bidding war. Most Listings are going 10-50K over asking and, in some cases, much higher. What he shouldn't do is buy a house where he would be underwater if the market corrects. In my area, there is no more land available, so prices should be stable. The other part of this equation is the number of rental units being developed in NJ due to the Mt. Laurel Decision and requirements for Towns to give developers realistic opportunity to build. Every town has a number they have to satisfy in this next round in 2025. That will take some buyers out of the market, but many more are moving here because of the Schools and quality of life. Property taxes in Northern Bergen County are high and they will only go up because of the reluctance of shared services. Each town has its own PD and emergency services and many have their own School District. There are a lot of nuances to this. Without knowing where he's looking and his financial situation, that's all I can offer you.

[squibber]

Interesting and useful info, guys!

[DaveBrown74]

The Fed cut interest rates by .5 percent last month, and more cuts are likely.  Unfortunately,  lower interest rates will only serve to raise home prices as the cost of mortgages drops, allowing people to bid more for homes.

The fundamental issue is that there is a housing shortage in the millions.  This is made worse by corporate interests that have purchased quite a few single family homes to turn them into rental properties.

At the end of the day, it's simply a matter of supply and demand. Either supply needs to increase or demand needs to decrease.   Things that would decrease home demand are less divorce, more marriage, fewer two-home families, and fewer corporate-owned homes.  Increasing supply can be more challenging.  There is only so much land available.  Many towns are not looking to increase residential property as it is the most costly to the community.  With the high school costs, residential properties tend to be service-heavy and tax-light compared to commercial and industrial properties.  So, it's not like many towns are actively looking to turn their open space into more residential units.

To circle back to the question at hand, laws could be passed in the form of tax deductions and the like that could encourage more home building.  State and Federal grants could offer some financial incentives to encourage more home-building in communities.   One thing I think could help is there are a lot of areas in cities and in the north that have sort of become ghost towns with tons of abandoned or unused properties.  Focus could be put on reinvigorating those areas as there is no need to consume precious open space in the process of creating more homes.


Sadly, another way home prices could drop is a serious economic downturn.  Outside of the Covid years, the economy has enjoyed pretty much good times since the big downturn of 2007-2008.   If we see a major downturn, it will more than likely be accompanied by a serious drop in home prices.

Great post Rich. I don't have anything further to add. You nailed all the points I would have hit on.

[Jclayton92]

The housing market where I am currently is wild. If you don't have 3/4ths the cost of the house in cash you aren't getting the house, someone else will gladly.

[Ed Vette]

The housing market where I am currently is wild. If you don't have 3/4ths the cost of the house in cash you aren't getting the house, someone else will gladly.

Where do you live?

[Jclayton92]

Where do you live?

Just moved from Los Angeles after 15 years there back to where I'm from in North Mississippi. My wife's family lives in the suburbs of Chicago and it's the same. Everyone offers 3/4ths cash to guarantee they get the home. The cost of living is so drastic that people pay cash upfront.