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The impact of higher interest rates on the Cape’s home sales

By BOB and GERI QUINN - HOMING IN | Mar 9, 2023

Bob and Geri Quinn

It all started innocently enough one year ago this month when the Jerome Powell-led Federal Reserve increased the Federal Funds Rate by a meager 25 basis points at its March 2022 Federal Open Market Committee meeting. At that time, the so-called “transitory inflation” that had reared its ugly head in 2021 was raging out of control and the rising costs of just about everything was wreaking havoc with family budgets.

With interest rates still abnormally low as the Fed launched its new war on inflation last March, the Cape Coral real estate market was still booming with a record number of closed sales in the first quarter of last year. In fact, in 2022 we set the all-time high for closed sales on single-family homes in the Cape for any month of March with 684 sales being finalized that month. Then very subtly, there were “only” 614 closed sales in the month of April 2022, which was 16.9% below the all-time single monthly high in closed sales ever recorded in Cape Coral of 739 sales in April 2021.

Even as the number of sales slowed a bit, the median sales price in our overall home market surged higher to a new all-time monthly high of $470,000 in April of last year. By the time the Fed moved rates another 50 basis points higher at its May 2022 meeting, we were pointing out the shift we were seeing in buyer attitudes as the bidding wars for homes had eased and potential buyers suddenly became comfortable making below list price offers.

It turns out that the 2022 peak in closed home sales in the Cape occurred in March, while median sales prices hit their peak in April of last year. To illustrate how the slowdown in home sales last year was correlated with the Fed’s dramatic shift away from the loose monetary policies of abnormally low interest rates towards a much tighter monetary policy of higher interest rates, in the first three months of 2022 the total number of closed single-family home sales in Cape Coral was running 10.7 percent above the previous record number of sales that was set in the first quarter of 2021. At that time, it appeared we were on our way to another record year in 2022. But by the time the Fed jacked up interest rates by another three quarters of 1% in mid-June, the headwinds of wildly high inflation and rapidly rising home prices and mortgage rates created huge affordability issues in the housing market. These headwinds eliminated a lot of buyers from pursuing their dream of buying a home, and unlike the housing market boom and crash that occurred some 15 years ago, this time common sense prevailed as many buyers threw in the towel and refused to chase prices any higher while mortgage lenders slammed the door shut on borderline borrowers.

By the end of June, the boom in our real estate market during the first quarter had wound down as the total number of homes sold in the Cape in the first six months of 2022 was now running 1.9% below the number of sales posted over the first six months of 2021. This decline in sales in the first half of last year came about from the 11.4% drop in second quarter sales from 2021 to 2022. As the Fed continued to jack up interest rates last year, our third quarter sales declined by 23.3% versus the third quarter of 2021, and following the one-two punch of sharply rising interest rates and the damage from Hurricane Ian, the Cape’s closed home sales numbers in the fourth quarter of 2022 plunged by 49.6% compared to the fourth quarter of 2021.

By late April and through the summer months of last year, many of the sellers coming onto our market with new listings were basing their initial asking prices on the market peaks that had already passed them by. Part of the problem that sellers were having in establishing an accurate listing price based on the changing market dynamics and values beginning back in the second quarter of last year was because the online “Zestimate” types of pricing tools were still reflecting record high pricing models. To that end, many sellers started having to reduce their list prices and adjust their expectations in order to attract a buyer as the realization began to sink in that our market had “flipped” from a raging sellers market to a somewhat slower paced buyers market almost overnight.

Fortunately, even though our market dynamics have shifted dramatically over the past year, we are still seeing a seasonal uptick in activity this winter, and homes that are priced properly to the market are attracting buyers. However, the window of opportunity for many sellers could close sooner than expected due to the growing likelihood that interest rates will continue moving higher for longer. In fact, according to mortgage giant Freddie Mac, a week ago mortgage rates increased to 6.65% on a 30-year fixed rate mortgage, marking the fourth straight week of rising rates. This is the longest streak of weekly rate increases since last September, and 6.65% is the highest mortgage rate since rates hit their most recent peak above 7% back on Nov. 10.

Along these lines, the Mortgage Bankers Association said that mortgage loan applications declined last week as concerns about the economy and continued high levels of inflation, combined with the higher loan rates, have caused some potential buyers to put their home purchasing plans on hold again.

Locally, as of Tuesday, March 7, there were a total of 1,380 active single-family homes listed for sale in the Cape through the Multiple Listing Service at prices ranging from $240,000 to $4.25 million. This was up 2.3% from the 1,349 listings two weeks ago and about 219% more than the 433 active listings a year ago on March 8, 2022. A year ago the median list price came in at $595,000 and as of this past Tuesday the median list price was at $534,950. The median list price is up 4.9% from two months ago on Jan. 3, when it was at $509,873. However, to provide some context, the more important pricing benchmark of median sales prices for single-family homes in the Cape looks like it will be around $419,999 in February, based on the preliminary numbers.

The current median “pending” sales price is at $405,999 for homes under contract with buyers, with most of these homes expected to have their sales finalized within the next 30 to 45 days. We would tend to read these lower pending sales prices and closed sales price values versus the higher median list price value as a sign of continued downward pressure on home prices. We would also acknowledge that some of the decline in pending and closed home sales prices can be attributed to the lower-priced sales of storm damaged homes.

Of the current 1,380 active listings, 491 of them are priced at $450,000 and under, equalling 35.6% of the homes listed for sale with a Realtor, including 23 homes priced below $300,000. While a total of 185 of the 1,380 active home listings in the Cape are priced at $1 million and above. There are currently 866 homes under contract as pending sales with 556 of these pending sales priced at $450,000 and under, including 33 homes under $300,000. A total of 48 homes were under contract for $1 million and above.

The sales data for this article was obtained from the Florida Realtors Multiple Listing Service Matrix for Lee County, Fla., as of March 7, 2023, 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 Quinns 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 Geri as a full-time Realtor in 2014. Their real estate practice is mainly focused on Cape Coral residential property and vacant lots.