Is Real Estate Stuck in the ‘80s?
What do you know about the 80s?
Big hair and disco. Jelly shoes and shoulder pads. Cabbage Patch and Pac Man defined our styles and fads. Baby Jessica and Miracle on Ice. Détente and Fall of the Berlin Wall. Challenger and Chernobyl gripped our attention and marked our memories.
And real estate? Why it was stuck in interest rate malaise.
At a glance, the chart below captures the comparison.
The grey stripes represent times of recession.
The smooth blue line depicts the effective interest rate on all U.S. homeowner mortgages.
The yellow jagged line reveals the current 30-year fixed mortgage rate for new home loans.
The greater the gap between the yellow jagged line and the smooth blue line, the larger the discrepancy between current interest rates and the average interest rates held by most households.
The last period of an extensive gap? Why the 80’s.
While the comparison in interest rate gaps appear similar, are there any major differences? Yes. One.
In the 80’s, as interest rates spiked, housing prices retreated. The reality of affordability hit buyers and sellers equally. And here lies the distinction. Unlike the 80s, home prices in most U.S. markets are not plunging. The reason? Supply and demand.
“U.S. homes remain in critically low supply after more than a decade of underbuilding, and with most homeowners who already refinanced at low pre-pandemic rates being ‘reluctant to leave their homes,’” according to Jason Pride, chief of investment strategy and research, and his Glenmede team (creators of the above displayed graph).
While homes have descended from their pandemic summit, sellers are still fetching handsome prices. The U.S. national average, in the second quarter of 2023, based on median sales prices, was $416,000; significantly above the $358,700 in the fourth quarter of 2020 according to the U.S. Census and HUD data.
The Glenmede team added, “Until the supply gap is filled by new construction, home prices and building activity are unlikely to decline as meaningfully as they normally would given the headwind from rising rates.”
And in Austin?
One thing for sure, in the outlying suburbs, construction shows no sign of abating. All we need now for existing home sellers is to see a pullback in interest rates.
And who knows, maybe Barbie the Movie is a harbinger of more 80’s redux trends – like brisk home sales and mullets. Uh, on second thought, let’s just stick with real estate.
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