The Housing Market as of Memorial Day, 2023. Tip O’Neil famously said, “All politics is local”. These days, so is the housing market.
If you are considering whether to buy or sell a house, and you live in Central Massachusetts, the national trends in home prices are pretty much irrelevant to what’s happening here, in towns like Westminster, Princeton, Holden, Gardner, Ashburnham, and other local communities. Elsewhere, such as out in the “Golden state” of California, housing prices are dropping by huge percents, and since much of this is happening in highly populated areas, this trend 2,500 miles away from us has a big effect on national trends….but little to no effect here in central Massachusetts.
Here, the three big factors driving local housing markets are the classic ones–supply, demand, and interest rates. All are inextricably interrelated, but are producing strangely counterintuitive effects. As an example, high mortgage interest rates (they are now hovering around 7%) should hurt demand for houses, because interest rates drive up buyers’ monthly payments, and drive down how much money the bank will lend them via a mortgage. That should make for less price competition when a home goes on the market.
However, that’s not what’s happening. Even though (thanks to interest rates) there are now fewer qualified buyers bidding against each other for houses, home prices are continuing to rise, and we’re seeing bidding wars as people offer well over listing price. Why? Because the supply of homes for sale is now so low that it outweighs the effect of high interest rates. There just aren’t many homes on the market, so there are now more buyers looking for houses than there are sellers of houses.
And why so few sellers? A number of reasons, but foremost amongst them is that ‘you’ve got to live somewhere’, so if you sell your house, you’ve got to buy a house (or have somewhere else to go), which means your mortgage interest rate, that perhaps right now is 2.75%, will soon be just as high as it is for everyone else who is buying a new house, unless you happen to be a cash buyer.
Another major but often overlooked reason for the local shortage of houses for sale is that there is very little buildable land available in our area, and if there is a buildable lot for sale, the price will be high. This situation severely limits the construction of new homes, preventing the supply of homes from rising while driving up the cost (and hence sale price) of new construction. Basically, lots of people are moving into areas like ours, and nowhere near enough new homes are being built to satisfy the need for new housing. Hence, bidding wars and rising prices.
The reasons for the shortage of land that’s buildable is due to a lot of well intentioned and good reasons: wetland protection laws (you can’t fill in a marsh and build a house), zoning (in California there is literally often, side by side, just a few feet between quite expensive homes, while here in Princeton for instance, lots have to be 2 acres at a minimum. In California you might very well have six houses on two acres. Protected land (here in New England we protect our forests and wildlife). All good ideas, but all limit new construction.
So what do you do? If you want to sell your house, it’s a good time to do so, assuming you’ve planned your next step. If you’re a buyer, you need to be creative, think long term, know your budget, and maybe be a little lucky. As pointed out in a previous article, even people who bought homes in California with 18% mortgage interest rates eventually made out, because they refinanced when rates came down. At least you aren’t tossing your money away by paying rent (you are paying a 100% interest rate with nothing towards principal). And once you get into a home, most likely the value will go up (since inflation isn’t moderating much), plus when interest rates come down, refinance. And there will always be houses for sale–moving for a job, divorce, inheritance, homeowners needing to downsize to single level living, or just trying somewhere new. The trick is to be ready financially (ducks lined up with a solid mortgage lender), be able to “put your best foot forward”, and of course work with an experienced, well respected realtor to help you navigate this somewhat bizarre current market.
Lastly, there is some worry about ‘raising the debt ceiling’ and its effect on the housing market. This is an issue that recurs every so often, and this time appears to be no different. The basic issue is that our government spends substantially more money, on things as diverse as social security, national defense, and paying farmers to not grow wheat, than it takes in via taxes. So to pay their bills, the government borrows the money. Now if anyone feels bad about how much they owe on credit cards, consider what our government owes: about $31.5 trillion. When you are this deeply in debt, just the interest alone is gigantic beyond comprehension. Luckily the US government is not borrowing this amount on a Visa card.
In order to pay the bills, the government needs to borrow a lot of money, and they can only do so if Congress allows the debt ceiling to be raised. The eventual outcome is always that the debt ceiling is raised, as to not do so would be a financial calamity, but nevertheless there is plenty of posturing and negotiating between the parties to get to an agreement. It currently looks now as if there is an agreement in the works, which is to be expected.
How is the US government ever going to get out of debt? It probably won’t and the best we can hope for is that the rate of increase slows, which it isn’t doing this year. The issue of course is that to borrow less, the government would have to either drastically cut spending, or radically raise taxes, and realistically neither is going to happen. It’s actually somewhat more complicated–-for instance, a good chunk of the national debt is held by governmental agencies. This article gives a good overview.
As regards the debt ceiling, my advice for home buyers and sellers is to not worry about it. It’s in the same category as worrying about earth being hit by a meteor…..it could happen, but if it actually did happen, paying a mortgage would be the least of anyone’s worries. And as of 6/1/23 we again have a deal to raise the debt ceiling.