SABRE Cuts January 2023 Commentary by Dr. Reid Cummings
Posted on February 3, 2023 by Dr. Reid Cummings
Greetings, and welcome to the January 2023 edition of SABRE Cuts. As we swim into the new year, we find the economy and many real estate markets, like the waters of our beloved Mobile Bay, somewhat choppy. The question on many minds is whether to wade in or stay on the dock. To help shed some light, we look back at how our market has moved over the last three years and then consider a possible indicator of where we might be headed.
Our analysis focuses on Mobile and Baldwin County single-family residential sales. We report quarterly average sales prices for new and existing homes to explain market direction as a function of demand. We use the number of quarterly sales transactions to underscore market strength and momentum.
Real estate transactions occur with what economists call a “lag,” referring to the time difference between a transaction’s effective purchase agreement date and the date the sale closes. Time-consuming due diligence items can include an inspection, a survey, and a title abstract. If the deal requires mortgage financing, added time can be needed for appraisal and loan underwriting. Real estate transaction lags can range from 2-6 weeks, depending on due diligence requirements. Because market conditions often change from contract execution to closing, remember the “lag” means that final reported closing data reflect the influence of economic conditions weeks before the closing date.
When the Federal Reserve moves interest rates higher or lower, it is with immediate effect. However, the Federal Reserve does not set mortgage interest rates; lenders do. Interest rate adjustments that typically follow moves by the Fed are often more market-driven and, therefore, more dependent upon demand. For example, if Buyers expect a rate increase, they may move to lock in a rate ahead of a Fed announcement. The “lag” is at play because rate rises in the future may accompany higher sales volume, meaning there was a flurry of sales activity weeks earlier ahead of the rate increase.
In Mobile County, existing home sales transaction activity dropped 23% from December 2019 through March 2020; new home sales dropped 62%. Things took off in April 2020, and trading was brisk, increasing each quarter through June 2021. A bit of choppiness followed, and sales topped again in June 2022. Existing home sales activity ended slightly lower than its beginning, with 7% fewer December 2022 existing homes transactions than in December 2019. In the six months from December 2021 through June 2022, interest rates moved from 3.11% to 5.7%, yet closings continued to rise. Why? The “lag.” New home sales were 14% higher, reflecting a much longer “lag,” the time required to build.
The story was similar in Baldwin County, yet with some interesting twists. Existing and new home sales activity increased slightly from December 2019 through March 2020. Again, the “lag” was at play. March closings had sales contracts 2-6 weeks old before the full effects of moves to close down economies in reaction to the pandemic. Existing home sales topped in June 2021, fell for the next three quarters, and peaked in June 2022; new home sales reached highs by the end of the third quarter. For the three years, existing home sales ended 1.7% higher, and new home sales finished 27% higher than at the beginning.
Within weeks after the pandemic began, as Americans began adjusting, many looked to move. As the pendulum swung quickly in favor of sellers, prices skyrocketed. In Mobile County, existing home average sales prices rose by as much as 34% in March 2022; new home sales increased by 32% by June 2022. Both existing homes and new construction finished higher, up 18% and 22%, respectively.
Price growth was quite strong in Baldwin County. Interestingly, the spread between the price of existing homes and new homes tightened as never before. Indeed, in December 2020, existing home prices surpassed those of new homes! Even more impressive is that new home prices did not retake the top spot until June 2022, 18 months later. Over the three years, existing home average sales prices finished 34% higher, and new homes soared to end 67% higher.
So what of the future? Many economists are mixed, with some forecasting a recession in the months ahead and others suggesting the Fed may have steered the economy successfully toward a “softer” landing. Only time will tell how the broader economy will fare, but regarding real estate markets, considering the relationship between inflation and the cost of money may provide an important clue.
When the federal government reports the inflation rate, they are actually reporting the year-over-year percentage change of the consumer price index or CPI. In previous issues, we have explored the CPI’s importance as an economic indicator, so we will not elaborate here. From a post-pandemic low of 0.6% in June 2020, inflation rose to 9.1% two years later. By December 2020, interest rates had reached a low of 2.67%, rising to a quarterly high of 6.7%. Within a year after the pandemic began, inflation exceeded the 30-year mortgage rate and has remained higher.
The Fed just pushed the discount rate up by 25 basis points. They made clear they have seen some signs of softening and are watching for more. Lower rates will follow when they are confident that interest rate increases are working to push inflation lower. The apparent convergence of inflation and mortgage rates by December 2022 is encouraging.
Our readers know we recently hosted our first post-Covid SABRE Market Summit last summer. Our focus was on how blockchain technology is changing all aspects of the real estate industry while blazing new trails in real estate investing in the metaverse. Those in attendance will agree that joining us was a good investment of their time and money. We were so glad to be back on campus. The turnout was just tremendous, and we look forward to our 2023 SABRE Market Summit on June 21, 2023. Please look for an announcement soon!
Until next time, from everyone at SABRE, we wish you and yours all the best.