MARKET IMPACT REAL ESTATE & 2025
Patrick Stone is Chairman and Found- er of Williston Financial Group, the Portland, Oregon-based parent com- pany of several national title insurance and settlement services providers, including WFG Lender Services and WFG National Title Insurance Com- pany. Stone’s lengthy career in real estate and related services includes C-level positions with three public companies and serving as a director on two Fortune 500 boards. His se- nior executive management positions include nine years as president and COO of the nation’s largest title in- surance company, chairman and co- CEO of a software company, and CEO of a real estate data and information company. He has been previously honored by Inman News as one of the “100 Most Influential People in Real Estate.”
By PATRICK F. STONE Owning a home is often referred to as the American dream, with home- ownership being the basis for much intergenerational wealth. However, in current market conditions, the media’s obsession with real estate is centered on the extraordinary price appreciation of the last few years and the concern over some type of market adjustment. Historically, the residential real estate market in the USA is and has been mostly about supply and demand. Supply is typically new construction, resale of an ex- isting home, or REO sales (foreclosed properties). Demand is comprised of need, desire, and affordability. At this time, supply is lacking, mostly because we have underbuilt over the last 15 years. Burns Research estimates that underlying US demand for homes exceeds supply by 2.1 million units. Resale activity has been negatively impacted by high mortgage rates over the last year and a half, and by the fact that people are staying in their homes much longer. In 2005, the average length of home ownership was 6.5 years. Today it is 12.3 years. Many attribute this to the fact that people were able to purchase with extraordinarily low interest rates, in many cases at or be- low three percent, creating what is called “rate lock.” But there is also a social factor, as the amount of people moving annually has gone down steadily. In the mid-1980s, around 18 to 20 percent of the US population moved every year, but that percentage steadily dropped to a point near 10 per- cent prior to the pandemic. There is also evidence that Baby Boomers have developed a sentimental attachment to their homes, and as a gen- eration, they are moving less often. Finally, REO sales are at a minimal level, and given the quality of mortgages originated since 2010, we are unlikely to see any major foreclosure wave and resultant flood of dis- counted properties. While supply is low, demand is strong when measured by need and desire, but impacted negatively by affordability. Need reflects the sec- ond-largest population bubble in the home-buying age since the baby boomers. There are approximately 141 million Millennials and Gen Zers in the USA, and over 90 million are within the home-buying age. Some have already purchased a home, but there will be a significant amount of the population looking for a home over the next 10 years. That is prompt- ed by the desire to own a home. While it is hard to measure desire, the pandemic made everyone keenly aware of the benefits of controlling your living environment. Moreover, most people want to raise their fam- ily with amenities for their children, like a yard. The movement towards working from home has also added to the attraction of homeownership. In a survey earlier this year, 95 percent of people 20 to 40 years of age said they want to buy a home, with 68 percent viewing listings online twice a week, and 41 percent following Realtors on social media The biggest impediment to demand is affordability. Mortgage rates in the high six to low seven percent range severely impact the ability of many to qualify and financially support payments. While many will point out that mortgage rates have historically been in this range or higher, the current cost of a home is three or four times higher than it was last time rates were at this level. Home price appreciation and availability vary greatly by geographic lo- cation and the type of home desired. Overall, it is estimated that home values have increased between 40 and 50 percent since the end of 2019. Over the last 40 years, price appreciation has averaged 4.8 per- cent annually, but the pace of appreciation and total value varies sig-
nificantly by metro area, state, and region. Breaking the country down into four regions -- the Northeast, South, Midwest, and West -- results in dramatic differences in both median price and price appreciation rates. For the most part, the South boomed during the pandemic, the Midwest saw growth, and the Northeast and West trailed. This can also be seen in the level of appreciation by state. Over the last three years home price growth in Florida is up 42.6 percent, while it is estimated that growth in California was 23.5 percent. Much has been made about the amount of relocation from California to Texas, but a major motivation for this trend was that homes were significantly more affordable in Texas, which facil- itated young, first-time buyers getting into a home. The disparity is still meaningful, with California having a median price in the high $700,000s, while the median price in Texas is in the mid $300,000 range. Almost all real estate professionals, as well as those seeking to purchase a home in the foreseeable future, are asking, “When will mortgage rates come down?” and “Will we see a meaningful decline in prices?” With regard to mortgage rates, the USA is the only country in the world with the consistent availability of a 30-year fixed-rate mortgage. Historically, that type of mortgage has been priced about 1.5 to 2 percent above the 10-year Treasury Bill. That spread elevates as rates go up, and it has been running 2.5 to 3 percent above the 10-year T-Bill. It is reasonable to assume that the 10-year Treasury Bill and the 30-year fixed-rate mort- gage will both come down as inflation abates and that the spread be- tween the two will return to the norm. Many expect to see the mortgage rate somewhere around or below 6.5 percent by year-end and in the high 5 percent range by the end of 2025. They could quite possibly be lower than that, depending on how fast the Fed cuts rates, but it may be unrealistic to think we will see rates drop below 5 percent any time in the near future, as the massive quantitative easing implemented by the Fed after the financial crises (2008-2010) will not be seen again in the foreseeable future. While interest rates and availability will steadily improve at all levels, we are already seeing a noticeable increase in the luxury market, where interest rate-related affordability is much less of an issue. While the defi- nition of “luxury” changes by market, it is generally the top 5 percent of properties price-wise, and, in most cities, that includes all homes priced over $1 million. In Q1 2024, sales were up year-over-year for this seg- ment for the first time since 2021. 2025 should see similar improvement in all segments of the market as interest rates decline and affordability improves. Demand and desire will remain strong, builders will pick up the pace of new construction, and the market will trend in a more normal fashion.
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