Higher interest rates and Hurricane Ian impacting sales
As we have pointed out in recent columns, the number of closed home sales in Cape Coral during the month of September and in the third quarter of this year had already declined sharply prior to Hurricane Ian due to the Federal Reserve’s war on inflation. When the Fed launched its heavy artillery against inflation in the form of four consecutive 0.75 percent interest rate hikes to the Federal Funds Rate beginning in mid-June through their most recent meeting in early November, the housing market both locally and nationally slowed dramatically. Directly targeting the strong housing market and intentionally slowing it down to “stall speed” with higher mortgage rates was one of the Fed’s intended consequences as it tries to gain control over the still abnormally high levels of inflation, while trying to bring the economy in for an elusive soft landing in hopes of avoiding a severe recession.
By some measures, especially in the real estate market, the Fed is starting to see results as the sharp rise in mortgage rates this year has resulted in a slowdown in the number of homes being sold and prices have softened from their peak levels earlier this year. The housing market has gone into a recession complete with an estimated loss of trillions of dollars in home equity, according to the most recent mortgage monitor report by the research firm Black Knight, while also noting that the housing equity position is still stronger when compared to the beginning of the COVID pandemic.
As another sign of the weakness in the real estate market, significant job layoffs in both the mortgage and real estate industries have accelerated this year. During the post-pandemic housing market boom hundreds of thousands of people went to work in the mortgage and real estate businesses, and now many are faced with losing their jobs due to the drop in home sales, along with the declines in new mortgage loan originations and mortgage refinancing.
We are finding that a lot of people do not seem to grasp the significant impact that higher interest rates are having on the real estate market, home values and affordability. We came across a good illustration of this in the Nov. 10, 2022, edition of Weekly Real Estate News, which is an online email news service that compiles and shares third party real estate articles. This one was written by David Chang, ChFC, CLU, and it was featured in the well-known Motley Fool on Nov. 6 of this year. Chang pointed out that interest rates on a 30-year fixed rate mortgage had more than doubled from the beginning of this year, rising from 3.11 percent to 6.92 percent. To illustrate the impact of this on a home buyer, he calculated that a $500,000 mortgage at an interest rate of 3.11 percent would have the same monthly payment as a $325,000 mortgage at 6.92 percent.
Let that sink in for a moment. That is a huge impact on the buying power of someone looking to buy a home today, especially if you look at it from a buyers perspective where they were looking at the quality, size, location and features of a $500,000 home, and now have to settle for a home at $325,000.
Looked at it from another perspective, Chang calculated the monthly payment on a $500,000 mortgage based on a 3.11 percent interest rate as being $2,137 per month, versus a payment of $3,299 per month at a 6.92 percent interest rate. In simple terms, a buyer who would have been the right fit for your home can no longer afford it, while the buyer who could afford to buy it now probably views it as a letdown compared to what they could have bought earlier this year. As a seller, through no fault of your own, the market has shifted dramatically this year and not in your favor.
When one combines the impact of the current Fed policies on the real estate market with the direct after-effects from Hurricane Ian on our local real estate market, the near-term results are proving to be very bumpy. This was evident in the Cape’s October home sales numbers and we tend to think the effects of Ian will linger longer than we would all like. Sadly, Hurricane Nicole wrecked more havoc in people’s lives across Florida, while causing some additional delays in closing some pending sales in our area.
Here is a brief overview of our recent market results.
Home prices in our market have clearly softened from the peak prices earlier this year, and they now seem to be range bound at a somewhat lower level, but to date, local prices have not collapsed and they generally remain above our 2021 price levels. By comparison, as we look around at various parts of the U.S., there are some areas where prices in the luxury home market have plummeted in the past year, with varying degrees of weakness in other price sectors. Making price determinations in our market can get a bit tricky with homes that came onto the market 3 to 6 months ago that were priced relative to the peak market prices from earlier this year, but that have yet to attract a buyer. Most of the sellers in this position are struggling to accept that they have had the legs cut out from under them home value-wise by the actions of the Federal Reserve.
When it comes to the number of closed single-family home sales in Cape Coral during the month of October, currently at 213 sales, it is going to be the worst October for sales since back in 2011 with 180 sales, and in 2012 with 221 homes sold. Sales this October are running 61.3 percent below the 550 sales in October 2021, and 44.1 percent lower than the dismal 381 closed home sales in September of this year. As of Nov. 15, there were 584 homes in the Cape under contract with buyers as pending sales, most of which are likely to be finalized as closed sales within the next 30 to 60 days. A total of 19 of these 584 pending sales are priced at $1 million and above. By comparison, back on April 19 of this year, when the median list price hit its peak of $610,000 in our weekly market survey, there were 998 pending sales with 77 of these priced at $1 million and above.
On Nov. 15, there were 1,260 active listings for single-family homes in Cape Coral through the Multiple Listing Service at list prices ranging from $240,000 to $4,999,999. The median list price came in at $500,000 and there were 512 listings at $450,000 and below, with 347 of these at $400,000 and under. Only six homes were listed for less than $300,000 and a total of 139 homes in the Cape were listed in the MLS at $1 million and above. Both the active listings and pending sales have been treading water in a tight range recently.
On a positive note, softer inflation readings for the month of October has resulted in mortgage rates dropping back below 7 percent and it has increased hopes the Fed will be able to ease up on the interest rate hikes. We are still seeing serious out-of-town buyers looking for homes in the Cape, but they are very price conscious in looking for reasonably priced homes and sellers should tend to expect offers to come in below their list price and negotiate from there.
The sales data for this article was obtained from the Florida Realtors Multiple Listing Service Matrix for Lee County, Fla., as of Nov. 15, 2022, unless otherwise noted. It was compiled by Bob and Geri Quinn and it includes information specifically for Cape Coral single-family homes, and does not include condominiums, short sales or foreclosures. The data and statistics are believed to be reliable, however, they could be updated and revised periodically, and are subject to change without notice. The Quinn’ are a husband and wife real estate team with the RE/MAX Realty Team office in Cape Coral. They have lived in Cape Coral for over 43 years. Geri has been a full-time Realtor since 2005, and Bob joined with Geri as a full-time Relator in 2014. Their real estate practice is mainly focused on Cape Coral residential property and vacant lots.