Low Mortgage Rates WON'T SAVE Austin's Housing Market

After nearly four years, the Federal Reserve has finally cut interest rates. And a lot of people are expecting this will get the housing market moving again. But I've got some news for you that you're probably not going to like. Lower interest rates are not going to change things much in the housing market, especially here in Austin. The last time the Federal Reserve cut interest rates was March 2020, when the pandemic was hammering the economy. For the next two years, the federal funds rate stayed close to zero. And during this time, prices for everything, including housing, skyrocketed. In March 2022, the Federal Reserve responded by aggressively raising interest rates to bring down inflation. And ever since, the housing market has been stuck. Now, let me be clear. There are still homes being sold, but the number of transactions has dropped dramatically. Last year, there were two million fewer homes sold in the United States than there were in 2021, which is a 34 percent decline in the number of transactions. Another way of illustrating this is that so far this year, only two and a half percent of existing homes have changed hands, which is 37 percent lower than in the middle of the pandemic and 31 percent lower than before the pandemic. There is no doubt the Federal Reserve interest rate cut is a big deal. But what kind of impact is that going to have on mortgage rates in the near future? Many economists are saying we're going to land somewhere in the high five percent range by the end of the year, which is still higher than what builders have been offering for these last two years. And for those who did not buy a new construction home in the last couple of years when builders were offering those kind of rates, can we realistically expect that now that interest rates are down to that same range that what they've really been doing is waiting to be able to buy an older resale house? This brings up the difference between the resale and new construction markets during the last two years. Across the Austin Metro, 32 percent of all the homes sold this year have been new construction. And the median price of those new homes was $50,000 less than the median price of the resale homes. You might expect the price of a new construction home to be higher than a resale. But remember, these numbers for the entire Metro. On one end of the spectrum, there are areas like the city of Austin, where only 10 percent of the homes sold were new construction. And the median price on those new construction homes was over $100,000 more than the resale homes. If you compare that to an area like Buda Kyle, there is more land available to build. So 60 percent of the homes sold were new construction. And the median price of those new homes was only slightly higher than the median price of the resale homes. So if someone's thinking about buying a new construction home, it's probably going to be bigger, less expensive, and they're going to have a lower interest rate. But if they want to be closer to the city of Austin, there's going to be less new construction available. And the prices on both the new and the resale homes will be higher. So maybe interest rates are not the only thing that's been holding them back. Let's go back in time to April 2020. The lockdowns had just started. Work from home became the norm. And it seemed like everybody decided they wanted to move to Austin. If you called a builder, it didn't matter what part of Metro or what price point. If you called them up and asked to set an appointment to buy one of their homes, every single one of them would tell you the same thing. They are all sold out and have nothing available to buy. But they might have new releases in a month or so. And you can get on the waiting list for the right to bid against all the other potential buyers to see who's willing to pay the most. You don't like that option, so you start looking at resale homes and find out that if you want to succeed in buying one of those, you're going to have to pay more than what it's listed for. All this bidding over list price certainly increases sales prices. And a lot of people like to think that it also increased the values. But let me ask you this. If that truly was a new value, why are there so many homes that have remained unsold over the last couple of years? And if you still think it's interest rates, why is it that a comparable house in the same neighborhood will sell once that price is reduced to a number that a buyer is willing to pay? The problem we have here in Austin is that for resale homes, there is still a gap between what a seller thinks the house is worth and what a buyer is willing to pay for it. That gap is a lot narrower than it was just a few years ago. But it's going to continue to be a problem no matter what the mortgage rates are. There are a lot of buyers out there who have bought into the idea that since prices are higher than they think they should be, it's only a matter of time before some kind of housing crash forces those prices lower. The problem with that kind of thinking is there is nothing that's forcing those sellers to take less than what they think the house is worth. If they couldn't pay the property taxes or if the house is in foreclosure, they might be more open to cutting their losses and taking whatever else they can get. As long as they have the luxury of waiting, those prices are not going to move very much. And if you don't believe that, you might be surprised to learn that 30% of all the active listings in the Austin Metro have been on the market for over 120 days. And 15% of those listings have been in the market for over 180 days. And this doesn't include all the expired withdrawn listings that were listed for sale but never sold. During the pandemic, Austin saw some of the highest home price increases in the entire country. But when mortgage rates began to rise in March 2022, that buying frenzy stopped. Since then, there have been 30 to 40% less transactions. And when there's less transactions, that means the number of active listings continues to grow. Builders responded to this by lowering price and offering promotional interest rates. But many resale sellers have been resistant to lowering prices, which means those houses have stayed unsold for long periods of time. Now that mortgage rates are beginning to come down, the expectation is that this will bring more buyers back to the market. But there is still a gap between what sellers think their house is worth and what a buyer is willing to pay for those houses. Now that gap is a lot narrower than it was a few years ago, but it's going to take more than lower mortgage rates to get it to where it needs to be so the number of transactions can get back to where it's been historically. There are a lot of buyers out there who think the only way out of this is some kind of major market collapse. And in this video, I'll show you why that is very unlikely.