Earlier this year, I spoke about the spring switch, which touched upon consumer confidence and the fear of missing out. With rates hitting an all-time low on the 30-year mortgage in January, we saw a multi-month rise in rates leading up to early May. This exasperated the move in home prices paid and what people were willing to do to secure the deal, as many felt the train on low rates was leaving the station and no one wanted to be left behind.
In a normalized environment, housing prices typically grow at a 3% annualized rate. In suburban areas of Minneapolis, a key market of the Covid-era U.S. housing boom where prices have surged by more than 14.6% year over year ending in September, after setting an all-time high July, according to the Case-Schiller housing index. But in a sudden reversal, buyers are now feeling a moment of freedom. Asking prices for houses are being reduced. Bidders no longer have to waive important contingencies to walk away victorious in multiple offer scenarios. Usher in, the sweet spot. The sweet spot is when markets correct through time rather than price. It opens up a healthy market for participants to buy and sell.
From my perspective, we couldn’t ask for a better contrarian setup over the past few weeks with an ugly news cycle regarding inflation, supply chain control concerns, and political posturing in Washington overspending. It added to the uncertainty and helped normalize fear.
Back to houses, for the foreseeable future, we are going to operate in this new normal where homes that have great appeal will be sold quickly and for top dollar. But that won’t be market-wide. There will be ample opportunity, especially downtown.
Speaking of downtown Minneapolis, we saw a pre-spring awakening with the rest of the market, but once the jury selection for George Floyd’s trial began it paused. Upon completion of the trial, the downtown market saw signs of its pre covid activity. We put a loft under contract for the highest price per square foot since 2016. We thought it had legs, but as the political landscape began to take hold of the headlines in late August regarding the forthcoming local election cycle, we have again found ourselves lost in translation. It’s a market near term that has no true identity. I’m a firm believer that we will not see the discounts witnessed last fall, based on pure pricing levels, yet nor are we back on track.
We are not going to start a major trend lower anytime soon. Why? Risk assets love the early signs of an inflationary environment. As an example, dating back to the 1920’s stocks have not entered into a bear market with the 10-year treasury sub 4%, an exception being the covid flash crash witnessed in March of 2020. Stocks and housing run together. They are the two most valuable things a human can historically own to build wealth. Real estate should return to trending at a 3% annualized growth rate.
This last jobs report along with a host of other economic issues makes it difficult to justify any tapering this year, with current forecasts looking towards mid to late 2022 for a rate hike. It’s all theater. Sure, The Fed is going to begin unwinding its monthly MBS purchases, which is going to shrink the invisible hand that has been supporting depressed rates. The Fed knows they can’t taper right now. So what does this mean? Speculative assets across the board are still in an upward trend higher.
For those that are waiting for the winding down of government-sponsored programs to flood the market with inventory, only 2.28% of all loans are in forbearance right now (used to be over 8% at the beginning of the pandemic). Moreover, one of the most googled searches this spring and again this fall was when will the housing market crash. I don’t think it will as we continue to climb the wall of worry.