Market Still Strong Despite Rate Boosts

Market Still Strong Despite Rate Boosts

Brad O’Connor directly addresses camera: Persistently rising mortgage rates continued to constrain existing home sales activity in Florida this October, based on the latest statistics from Florida Realtors.

Before we dig into October’s figures, though, we thought it might be useful this month to recap how the market arrived at this point.

In the years leading up to the pandemic, the number of closed existing home sales in Florida each month more or less followed the same seasonal pattern, peaking in spring and easing off a bit through the remainder of the year.

Then came 2020, and the Covid-19 pandemic along with it. Closed sales were hit very hard for a couple of months, but during this time, the Federal Reserve took action to lower interest rates in order to keep the financial markets running and stimulate the economy.

By the beginning of May, the average 30-year fixed mortgage rate was down below its previous all-time low of about 3.3%, based on data from Freddie Mac’s weekly Primary Mortgage Market Survey of lenders all across the U.S. And from there, it steadily declined even *further* to an astoundingly low level of about 2.7% at year’s end.
Combined with several other factors brought on by the pandemic, these record low rates had the effect of igniting a surge in the demand for homes in Florida and elsewhere around the nation. Existing home sales skyrocketed in the second half of 2020 and maintained this momentum for all of 2021, as well.

The ratio of prospective buyers to home sellers ballooned, and home prices were bid upwards at an alarming pace, but monthly payments on new mortgages increased much more slowly because of the record-low interest rates, so this increase in home prices failed to deter most buyers.

That brings us to the beginning of 2022, which marked the end of a nearly two-year period of record-low mortgage rates, as the Fed began to reverse its course in order to fight pervasive inflation in the economy. The rapid pace of the resulting increases in interest rates has dramatically increased the monthly payments required for new mortgages, and home price growth has only recently started to show signs of responding.

In terms of closed sales in Florida, 2022 started out a lot like 2021, but soon, the shock of such rapid increases in mortgage rates caused many buyers to suspend their home searches and sit on the fence, and some others to even drop out of the market as the rising monthly payments required for a mortgage at these rates exceeded their budgets.
As a result, the second half of 2022 has seen the level of existing home sales in Florida more-or-less fall in line with the typical pre-pandemic seasonal trends. The fact that monthly sales still remain in the neighborhood of pre-pandemic levels despite today’s significantly higher home prices and mortgage rates only illustrates that despite these headwinds, housing demand in Florida continues to receive support from its recent surge in post-pandemic in-migration, vacation home purchases, and the ever-increasing number of millennials looking to find a home for their growing families.

Mortgage rates were never destined to stay at a level of 3% or lower, inflation or not, so probably the best way to look at 2021 is to give it an asterisk in the record books. It was never destined to be representative of any kind of new normal in the real estate market.
This is important to keep in mind when we look at how closed sales are currently performing in 2022 compared to a year ago. Single-family home sales this October were down roughly 25% compared to last October, while sales of condos and townhouses fell by almost 27%, with the size of these declines being attributable to factors such as last year’s sales being fueled by record-low rates and this year’s combination of both high prices *and* a rapid escalation in rates to levels not seen since 2002.

The decline in overall sales in October was relatively uniform across Florida’s 22 metro areas, with one notable exception being the portion of Southwest Florida that saw the most property and infrastructure damage from Hurricane Ian. But as we discussed last month, historical data show that residential real estate activity in Florida, at the county-level, at least, has typically rebounded fairly quickly after even the strongest of storms.

The median price for single-family home sales closing in October came in just under $402,000, which is a year-over-year increase of 12%. That’s still well above a normal rate of growth for home prices in Florida, but it nonetheless represents a significant decline from May’s year-over-year increase of nearly 22%. Over in the townhouse and condo category, meanwhile, the median price in October was up by more than 19%, to $310,000. That’s a high rate of growth compared to what we’re seeing on the single-family side, certainly, but it is notably down from the nearly 29% year-over-year increase we saw in May in this category.

New listings of single-family homes were down by over 18% in October compared to a year ago, while over in the townhouse and condo category, they were down by over 19%. That’s a comparable decline to September, but remember that the last week of September saw a dramatically reduced level of listing activity due to the approach and arrival of Hurricane Ian. The continued downward trend in new listings is counteracting the decline in sales, resulting in inventory levels that, while still rising, are not rising very rapidly in most markets. This has had the effect of tempering the slowdown in price growth in recent months.