Geri and Bob Quinn

We have been noticing a growing state of confusion about a lot of things lately, and when it comes to the economy, inflation, interest rates and the real estate market, confusing and contradicting data points seem to reign supreme. Much of this confusion is being caused by the Federal Reserve’s “great unwind” from its lengthy period of loose, “free money,” 0% interest rate monetary policies to its shift to a rapid tightening in the form of sharply higher interest rates.

In addition to aggressively changing the direction towards higher interest rates, the Fed has also been ridding its balance sheet of the “troubled” assets it bought through its Quantitative Easing programs during past financial crises, which is also pressuring interest rates higher. Basically, we are witnessing the Fed’s shift away from a multi-year monetary experiment that created the widely accepted “new abnormal” of record low interest rates that over-stimulated the economy and the markets, and the move back to the “old normal” of higher interest rates. In reality, nobody knows how this will play out, but all of the pundits, economists and market analysts seem to have a firm opinion about what will happen next.

Let us try to explain. On the one hand, some of the economic data would seem to indicate that the Fed is gaining control of the wild levels of inflation and the experts holding cards in this hand are convinced that the Fed has all but engineered a soft landing to the economy. These experts were telling us not to worry when mortgage rates spiked higher into the 6.5% range, because they claimed rates would be back down into the 5% range before the end of this year. On the other hand, the Fed keeps saying it plans to keep interest rates higher for longer and it seems that for every positive piece of economic data that comes out, another report indicates troublesome economic turbulence is just over the horizon. Experts holding cards in this “other hand” believe things are about to get a lot worse before they get better. They point to the sudden rise in mortgage rates to the 7.6% level this week, with the next move to 8% mortgage rates sooner rather than later.

We could continue breaking down all of the confusing and conflicting economic and market data, but we’ll concentrate on interest rates for now. Many of us have been around long enough to remember when interest rates were higher – and we mean a lot higher – than they are today. For example, this week the yield on the 10-year Treasury Note, which is the benchmark for setting mortgage rates in the marketplace, has spiked up to the 4.8% range. This rate is quickly approaching the 5% levels last seen back around 2007, just before the Great Recession changed everything. Prior to 2007 there were periods of time when 5% plus on a 10-year Treasury was considered “normal,” and back then it was normal for savers to earn more than 5% on money market accounts. Bank Certificates of Deposit paid rates of 7% plus, and mortgage rates were above 7%. So for a lot of people, a 7% to 8% interest rate on a mortgage does not seem like a big deal.

For some historical context, the highest mortgage rates in history were back in the 1980s, when 30-year fixed mortgage rates hit their peak level of 18.63% in October 1981. The yield on the benchmark 10-year Treasury Note reached its all time high of 15.82% in September 1981. So the return to “normal rates” for some people is a problem for others who have a personal world reality tied to the more recent record low rates on a 10-year Treasury that was at 0.318% on March 8 2020, and the all time low on a 30-year fixed rate mortgage at 2.65% in January 2021. It all comes down to a personal perspective and for a lot of people today, a mortgage rate over 7% seems outrageously high.

From a purely mathematical perspective, sharply rising mortgage interest rates have become a game changer for a lot of potential buyers. Simply put, higher interest rates raise the costs of borrowing and can throw the debt to income ratios required to obtain a mortgage completely out of whack for a lot of people. So someone who qualified for a mortgage when rates were at 5% or 6%, may not have enough income to support buying a home with a mortgage rate of 7.6%. Add in the costs for property taxes, along with the rising costs for homeowners and flood insurance, and even more potential buyers will be forced to the sidelines. The other part of this equation deals with the formula that says for every 1% increase in mortgage rates, a person’s buying power is reduced by approximately 11%. So homes become less affordable for a lot of buyers, and as more buyers get eliminated from the process it can start putting more downward pressure on home prices. This raises the likelihood that more homes will sit on the market unsold for longer as the inventory builds and the competition between sellers to reduce prices increases creating what can become a negative feedback loop.

So what does the future hold for interest rates, the economy and the housing market? A lot of experts are still expecting to see lower interest rates next year, and they are still calling for a soft economic landing, while believing home prices have likely already bottomed. Others see growing risks of a chain reaction in the form of a “financial accident causing something to break” if interest rates continue to rise the way they have been rising. Notably, Rick Santelli, a well-known long-time market commentator and editor for the CNBC Business News Network, warned this week that “the Fed is running out of tools” as he presented his case for substantially higher interest rates over the next seven years. Even if he is only half right, it would be a problem for home prices. All of this just illustrates the state of confusion.

In our local market the activity remains on the slow side as the inventory continues to rise. In our casual conversations with a number of Realtors, most are noting a lack of showing appointments. Although seasonality is a possible reason for the slower market, the higher interest rates above 7% could finally be weighing on the market.

As of this Tuesday, Oct. 3, the number of active listings for Cape Coral single-family homes in the Multiple Listing Service continued to climb, reaching 2,042 homes on the market at prices ranging from $215,000 to $7.59 million. The number of current active listings was up from 1,987 homes two weeks ago. The current median list price dipped slightly to $511,225 from $515,000 on Sept. 19. Out of the 2,042 active listings, a total of 557 homes or 27.3% of the homes available on the market are new construction homes.

The number of pending single-family home sales under contract with buyers in Cape Coral continues to decline, sinking to 610 on Oct. 3, from 647 two weeks ago. The current list of pending sales range in price from $175,000 to $3.395 million. The second lowest-priced pending sale was at $249,900. The median pending sales price came in at $399,900 with a total of 402 of the 610 pending sales priced at $450,000 and below. Twenty pending sales were priced at $1 million and above. Of note is that 45.4% of the homes currently under contract with buyers in the Cape are new construction homes either already built or being built in 2023. We will have more on the competition between existing homes and new homes next week.

The sales data for this article was obtained from the Florida Realtors Multiple Listing Service Matrix for Lee County, Fla., as of Oct. 3, 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 44 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.