June 21, 2013
The most recent blog on June 17, 2013, directed your attention to higher interest rates. It has been a prophetic warning from these pages for some time now, and reality is beginning to seep in: the Fed can try all they want, but they cannot, and will not, put a damper on interest rate rises forever. They admitted as much this week, and rates skyrocketed again, just days after the RayMax blog warned that previous interest rate rises were merely a shot across the bow and a drop in the bucket.
The rise in interest rates has put a damper on the meteoric rise in home builder stocks, and raised questions as to future new home construction. Lower interest rates have provided additional fuel for buyers and been a major catalyst in purchase of newly-constructed homes. We focus in this blog site on Northern Virginia and D.C., so I will limit the discussion to what is meaningful to us rather than making nationwide projections.
The short of it is this: Builders have been handed a windfall in the past few years by two major factors: 1) Low interest rates, and 2) The incredible unwillingness of sellers of existing homes to list their homes for sale. BOTH lynchpins are about to work in the other direction, meaning the builder punch bowl is about to become less potent, and maybe at some point withdrawn altogether. The easy money for home builders in our area has already been made.
Let’s discuss the impact of the two stated items above. First, higher rates. Despite recent rises and probable future increases, absolute rates remain so historically low that builders and buyers will be able to adjust to this. The number of buyers “knocked out” of the market because of a rise in 30 year fixed rates to, say 6%, is still marginal, and we are a long way from that number. In fact, the hoopla surrounding the sudden rise in rates may actually create a short term surge in purchases, as buyers who are on the fence seek to get in before rates leap any further.
The second item is of much greater concern to home builders, but gets virtually no “press”. To me, this is an uncontrollable potential negative which should concern the home building community. The factor is the inevitable competition from sellers of existing homes.
I remain perplexed as to why so few sellers have moved to take advantage of current market conditions which have generated a supply/demand imbalance rarely seen, in the favor of sellers. It is not as if the sheer number of potential buyers has skyrocketed, but rather, that existing inventory remains low. In fact, the inventory has remained at so far below any historical mean that a simple adherence to the age old theory that everything will revert back to the mean, in time, will eventually result in a cascading of new listings. I realize that nobody is predicting this. Be forewarned.
It is inevitable that the number of new listings will eventually increase, and increase dramatically. My professional estimation is that this will happen sooner rather than later. Interest rate surges will wake some people up. Appraisers are beginning to “catch up” with the reality of rising prices and becoming more friendly to higher sales prices. There is a pent-up selling demand not only from those who had been “under water” and not any longer, but those who had minimal equity and now have seen that become a more substantial number. And then add the usual factors to this elixir: a strong and mobile economy; people growing out of their current home space and needing to trade-up; people retiring or looking to sell and “trade down.” This group of potential sellers is all out there. They have been dormant for years. This will change. It may be sooner than we currently anticipate, and the change will alter the supply/demand dynamics in a major way.
For new construction home builders, an increase in existing homes for sale will prove to be a bigger rival to their profits and sales than higher interest rates.
For potential sellers, sitting on the fence, I suggest this: What are you waiting for? Conditions to sell will not get better than they are right now. Call me for further discussion.
Chartered Financial Analyst, CFA