The Housing Market’s Message to the Fed: Stop Raising Rates

In the 1970s, our country faced major inflation problems. The Federal Reserve (or "Fed" for short) acted decisively, raising interest rates so high that by 1981, mortgages had a jaw-dropping 18% interest. As you can imagine, this led to fewer people buying homes, though home prices didn't necessarily drop. To express their frustration, some builders sent lumber to the Fed Chair at the time, Paul Volcker. Their message? With rates so high, no one was building, making lumber pointless.

Jump to October 2023, and our housing leaders are once again chatting with the Fed, but with a calmer approach.

Earlier this week, three big names in the housing world - the Mortgage Bankers Association (MBA), the National Association of REALTORS (NAR), and the National Association of Home Builders (NAHB) - wrote a letter to the current Fed Chair, Jerome Powell. They're asking him to stop raising interest rates for a bit and not to sell off any more Mortgage-Backed Securities until the housing market finds its balance again.

They pointed out that today's high mortgage rates, with the average 30-year loan sitting at 7.69%, make homes less affordable. This has led to fewer mortgages being started and fewer homes being sold. In fact, mortgage applications have dipped to levels we last saw in 1996.

So, why has the Fed been raising rates? In simple terms, it's to reduce demand. When rates go up, fewer people buy homes. This means less demand for building materials and fewer jobs in construction. The hope is that this will slow down other parts of the economy and bring down the high inflation we're seeing.

The letter also mentioned a gap between the 30-year mortgage rate and a government bond called the 10-year Treasury yield. If this gap was more typical, our mortgage rate would be around 5.94% instead of 7.69% that we see today.

The big question now: Will the Fed stop raising rates?

In a recent talk, Raphael Bostic from the Atlanta Federal Reserve Bank said he doesn't think rates need to go up any further to bring inflation back to the Fed's desired level. But he did mention if inflation starts to rise again, they might reconsider.

So, how is the Bloomington real estate market holding up?

In the span from June through August 2023, Bloomington real estate experienced a noticeable decline in both new listings and sales: new listings dropped by 26.2% from 648 in 2022 to 478 in 2023, and closed sales also decreased by 21.4%, moving from 561 to 441 in the same period. Interestingly, the median sales price remained steady at $300,000 for both years. However, there was a slight decrease in the percentage of the original list price received, showing a 2.4% reduction from 99.2% in 2022 to 96.8% in 2023.

Zooming out for a more extensive look from September to August, we see a similar pattern. There was a 17.9% decrease in new listings, moving from 2,203 in 2022 to 1,809 in 2023. Meanwhile, the median sales price showed a minor increase of 2.2%, shifting from $288,000 in 2022 to $294,375 in 2023. The average sales price showed an even smaller growth of 0.2%, inching from $340,477 in 2022 to $341,139 in 2023. The graph at the bottom, which represents the rolling 12-month calculation for median sales prices, illustrates a consistent upward trend in Monroe County, with the curve for the entire state following closely. This suggests that while Monroe County faced some challenges in sales and listings in 2023, its property values have continued to rise steadily.