State of the Real Estate Market November 2022
Second Half of the 18.6-Year Real Estate Cycle Continues
We know it’s hard to fathom that real estate isn’t crashing before your eyes with interest rates rising, home prices dropping a bit, and all the television pundits screaming that the sky is falling. Bad news attracts eyeballs and eyeballs attract advertising. If you keep this in mind, you realize that the media really has no incentive to find silver linings or to accurately report markets.
A hawkish Fed is likely to raise interest rates yet again. Yes, the Fed was/is certainly behind the curve, as per usual. They ignored the trillions in stimulus pumped into the economy and kept printing with wild abandon to get inflation up to 2%. Once inflation caught up, they mistakenly assumed and overstayed their welcome on the “Inflation Is Transitory” narrative. They were too late to raise rates and then overcompensated, again, as per usual. At the same time, they unwound the balance sheet, which deflated the stock market. The combination of falling asset prices, a rising dollar, and increasing inflation has been a triple-whammy that combined with skyrocketing energy and food prices to wreak all kinds of havoc across the economy.
In spite of all that, banks are sitting on mountains of cash and housing inventories are still low. Banks make more money when they lend, so expect that process to flip into high gear shortly, which will help fuel markets again. Increased interest rates have given some home buyers pause, primarily because the increase in interest rates has lowered their potential loan amount.
Add to that the fact that a lot of folks were already living paycheck-to-paycheck and they turned to their credit cards to make up the shortfall. Credit card balances in the USA have increased substantially over the last year, which of course, affects debt-to-income ratios and thus, loan amounts, especially when credit card interest rates are typically variable and have been going up as well.
This sounds like the perfect storm, but it really isn’t. Unlike 2008, home owners are sitting on quite a bit of equity this time around. Many folks aren’t actually tapping their equity like they did last time because of rising interest rates, and again, HELOCs (home equity lines of credit) are generally variable interest rate products, which makes them somewhat less attractive.
One trend that is a bit disconcerting is the resurgence of ARMs (adjustable-rate mortgages). While there are certainly ARM strategies that can make sense, getting a short-time adjusted ARM in a rate-rising environment is typically ill-advised. Personally, we’ve never been a fan of ARMs. Mortgage brokers and bankers will scream that they have their place, but most borrowers simply don’t do the math.
If you have a 3-year ARM, your interest rate is only fixed for the first 36 months. After that, the rate adjusts based on the new interest rate. If there aren’t specific limits on the adjustment, the borrower’s payments could change drastically.
As an example, a $500,000 3-Year ARM at 5% with a 30-year amortization equates to a monthly payment of $2,684.11.
If that interest rate adjusts to 7% at the end of 36 months, the new payment becomes $3,326.51. That’s an increase of $642.40 or a 23.9% payment increase.
If all you can afford right now is $2,684, what’s the likelihood that your income will increase by 23.9% in the next 3 years? For most people, that seems unlikely, but they rarely do the easy math, let alone the worst-case-scenario math.
These types of interest rate adjustments priced a lot of people out of their homes in 2008. Couple that with a softening real estate market, and folks couldn’t sell their houses for what they owed on them. As a result, the short sale and foreclosure industry exploded with distressed houses.
Many of those were snapped up at the bottom in 2011/2012 by well-funded hedge funds and investors who were waiting in the wings. If you’ve been paying attention, hedge funds are not only buying single family homes one at a time, but also, they’re building entire single-family neighborhoods that are being rented out.
Our July report goes into this in a bit more detail, which you can read here:
https://StAugHouses.com/staughouses/real-estate-market-update-july-2022
If you absolutely need to get an ARM to buy your next property, at least make it a 5-year or 7-year adjustable. At this time, however, we highly suggest buyers align their house hunting to more closely fit their NEEDS than their WANTS and go with a 30-Year Fixed Mortgage. Even though the interest rates are above 6% right now, you can always refinance later.
With a fixed mortgage, you don’t HAVE to refinance if interest rates continue upward where you might HAVE to refinance if you decide on an adjustable rate. Even if you can afford a 15-Year Fixed Mortgage, we still suggest a 30-Year. This puts the lightest load on you to make your monthly payments.
If you’re having a good year and want to make extra payments – do so, but you’re not REQUIRED to do so. In other words, you can treat your 30-Year Fixed Mortgage like a 15-Year Fixed Mortgage, but you cannot treat a 15-year like a 30-year. Create the smallest possible obligation and discipline yourself to keep to your budget and your pay-off plan when times are good.
So, what’s the market actually look like right now?
Here’s the data for Single-Family Detached Homes in the Saint Augustine MLS for the Current State of the Real Estate Market
As of November 14, 2022:
877 Currently Listed
$651,105 Average List Price
78 Average Days on Market (A typical healthy market is 3-4 months, up to 6 months)
2022 Year-to-Date:
4,637 Total Houses Listed
3,761 Total Houses Sold (86.12%)
$511,178 Average List Price
$503,604 Average Sold Price (98.52% of Ask Price)
35 Average Days on Market
August 1, 2002 to November 14, 2022:
1,098 Listed
961 Sold (87.52%)
$522,830 Average List Price
$507,215 Average Sold Price (97.01% of Ask Price)
37 Average Days on Market
Year-to-date, houses have taken about a month to sell and have sold at a mere 1.48% Discount to Asking Price.
In the last several months, houses have taken about a month to sell and have sold at a 2.99% Discount to Asking Price.
So, what is the real estate data telling us?
It’s telling us that it’s still a Seller’s Market and that inventory is still low.
While there is a little more negotiation happening, we still believe that properties that are priced correctly from the start sell more quickly than those that are over-priced in the ‘hopes’ of squeezing out a bit more. There’s a fine line between overpricing and sitting on the market versus pricing correctly and selling quickly.
Average days on the market of properties that are presently listed have gone up quite a bit (roughly double), but the days it takes to sell is still well below what is typically considered a healthy market.
100% Cash Purchases Still Make Up a Significant Percentage of the Housing Market
Keep in mind that there is a huge chunk of the market that is ignoring interest rates entirely. All-cash purchases still make up about half of the properties sold in Florida. Those folks aren’t worried about what the 10-Year Treasury did today or what interest rates might do next month. Many of those folks also are coming from higher-priced markets and finding Florida houses well within their cash price targets.
Rentals and AirBnB
We’re still seeing investors acquiring real estate to obtain income through rentals, particularly short-term rentals like AirBnB. With the economy in flux and expenses up, some folks are pausing travel plans, so services like AirBnB will remain competitive. As always, Location-Location-Location is the most important aspect of any property purchase.
For short-term rentals, having an off-platform marketing plan outside of clearinghouses like AirBnB and VRBO, is extremely important. Build a clientele and rent direct when possible and prudent – there’s something to be said for assistance when things don’t go as planned. The more unique and user-friendly the rental is will also set you apart from other nearby options.
You can find local short-term rental information on our website here:
https://StAugHouses.com/staughouses/airbnb-and-short-term-rentals
Yes, we still stand by our July report:
https://StAugHouses.com/staughouses/real-estate-market-update-july-2022
Review our 18.6-Year Real Estate Cycle post as well here:
https://StAugHouses.com/staughouses/18-6-year-real-estate-cycle
We maintain that we are firmly in the second half of the 18.6-year real estate cycle.
Newest/biggest/best/innovative real estate developments are still being announced and have completion dates in the 2026-time frame, which we believe will be the top of the real estate market for this cycle. That top will likely be followed by a 4-year decline in real estate prices, a rise in foreclosures, and this time, we expect many of the too-big-to-fail banks and financial institutions to actually fail.
We suggest you research your banking institutions to minimize systemic risk since this banking crisis is likely to be met with Bail-Ins instead of Bail-Outs, meaning your cash gets converted to stock in the bank because they simply don’t have the cash available to disburse deposits. See the Cyprus Banking Crisis last time around.
This month’s failure of crypto exchange FTX is an example of the kind of failures that can occur and the magnitude to which they can affect the masses, seemingly from out of the blue. The media was touting the brilliance of the folks running FTX with Fortune Magazine even calling SBF (Sam Bankman-Fried) the ‘Next Warren Buffett’ and others calling FTX ‘The Next Goldman Sachs’. Sadly, for investors, it seems that he was actually the ‘Next Bernie Madoff’ running the ‘Next Bear Stearns’.
Thus far, it looks like $15 Billion (with a B) was liquidated almost overnight. Granted, this is likely the result of a combination of extreme risk-taking and over-leverage coupled with actual malfeasance and fraud, but the 2008 Bank Bailout wasn’t any different. FTX was considered too big to fail as well, but here we are. FDIC Insurance was near collapse in 2008, so don’t think that you’re covered just because you spread your accounts around.
Is it a good time to buy a home?
The short answer is almost always, YES.
You have to live somewhere, and you’re either paying your own mortgage or your landlord’s. Regardless of a 2026 top, that’s 4 years of potential asset appreciation you’ll miss if you’re renting. It’s nearly impossible to buy the exact bottom or sell the top, but you can certainly put yourself in a position to catch a good chunk of the move upward.
Our general outlook is not to wait to buy. If you need/want to change residences, buy despite interest rates, and simply refinance later when rates inevitably come back down. In addition, buy what you actually afford. Forget about keeping up with the Joneses or having the biggest house on the block. Just because you qualify for a large mortgage doesn’t mean you should take on that much leverage.
Consider your current and potential future financial positions and buy or invest accordingly. We can assist you in working out budgets, locating rental property opportunities, and of course, we work with one of the best mortgage brokers in Florida to make the prequalification process simple and painless.
Buying or Selling doesn’t need to be a daunting process. Having someone who represents your interests and will walk you through every step along the way is why you choose a Realtor in the first place.
Stress doesn’t need to be a closing cost.
If you’re considering buying or selling in Saint Johns County of Duval County, please consider us. We are an independent real estate brokerage where you are treated like family, not as a faceless number in a sea of franchises.
Thank you for the opportunity to earn your business.