The indicators are subtle: Balloons swaying from mailboxes on a steamy Sunday afternoon, bandit signs in the neighborhood right-of-way, and a small, but growing, cluster of real estate signs at the subdivision entrance. All would be perfectly normal except that all of those things were a rare sight during the hottest part of the housing boom of the last year. Our housing market has finally begun to soften as the Federal Reserve (FED) has increased mortgage rates in attempt to rein in inflation.
While most Americans are painfully aware of the rising inflation and have heard about the FED’s decision to hike interest rates, many are not aware of exactly what that means for homebuyers . . . and consequently the resulting effects on sellers. Let’s look at an example.
The MLS reports the median sales price for the Austin – Round Rock area was a whopping $550,000. Until the last few months mortgage rates had held relatively steady around 3.5%. So if a buyer for a $550,000 home puts down $110,000 (20%) at 3.5%, their monthly principle and interest payment (PI) would be $1,975. However, rates at the time of this writing are bouncing around 5.75%. If we bump the rates up in our example to 5.75%, we have a PI of $2,568 . . . an increase of $593. Most homebuyers are not in a financial position to absorb such an increase. Assuming our median buyer still has $110,000 for a down payment, they would now be looking at a $450,000 home in order to maintain their housing budget. As a result, one article I read estimated that the rate increases have eliminated the bottom 15% of prospective homebuyers . . . and the FED has signaled that at least two more rate hikes are expected by the end of the year.
The FED’s stated goal is to slow the economy and lower inflation without pushing us into recession. It is too soon to know how successful those efforts will be, but there is no doubt that it has begun to slow our residential market. To be sure, it is still a sellers’ market. We still have less than two months of housing inventory, but inventory is growing significantly, and we have seen numerous “price improvements” (the new lingo for price cuts). This has happened so quickly that it may take a few months to be able to understand if this is a small correction or something more serious.
The good news is the job market remains extremely strong. This month several national news outlets reported that on average two jobs exist for every job seeker. I would think that employment numbers in Austin will continue to lead the nation.
As always, I like to point out the opportunities. In this case, interest rates are finally high enough that I think it makes sense for some sellers to consider providing owner financing. For many years now, interest rates were so low that it made little sense to provide seller financing. Now, with the stock market in a major correction and rising interest rates, owner financing should have some appeal to certain sellers. Sellers may want to consider several factors.
First, most owners selling any non-homestead property are probably facing some substantial capital gains taxes. These taxes can be deferred by an IRS 1031 like-kind exchange for other property. Also, they can be completely avoided by dying. None of my clients have voluntarily chosen that last option, however. One other strategy to lessen the tax load is owner financing. The IRS collects the tax as the seller receives the proceeds, hence why many sellers have historically preferred installment sales. I like to say that it enables sellers to earn interest on their AND the IRS’s money. At this moment, I would expect that interest rates for owner financing might be 7% or more. Additionally, the seller is intimately familiar with the property and should feel comfortable with having it as collateral . . .especially with a significant down payment. Again, this is not for everyone, but it is a growing opportunity that we have not seen in years.
As always, I am here to help you or those you care about. Please do not hesitate to call.