Housing Market Reels
For the past couple of years, the storyline on the housing markets has been peppered with terms such as low supply/inventory, high demand, prices skyrocketing, all-cash deals, and bidding wars. However, a new storyline is being written.
The housing market has more than turned. It has spun on its axis. Here are the reasons why:
- New home sales have dropped 16.6 percent from March to April, the U.S. Census Bureau has found.
- About 19 percent of sellers lowered their prices during the four weeks ended May 22, according to Redfin.
- Pending Home Sales dipped 3.9 percent in April, reports the National Association of Realtors (NAR).
- The number of new homes on the market increased 8 percent over last year, according to Realtor.com.
Higher Mortage Rates
Many in real estate attribute the change in the housing market to higher interest rates.
The rate for a 30-year mortgage has been rising steadily. At this writing, it is 5.39 percent. That is an increase of almost one percent since February. In addition, the Federal Reserve has signaled it will continue to raise interest rates. This typically triggers a rise in mortgage rates.
Rising rates mean declining applications. Mortgages applications dropped last week by 2.3 percent, according to Moody’s Mortage Applications Survey. That followed a 1.2 percent decrease the week before.
More Homes for Sale
Realtor.com reports that the inventory of homes for sales last month increase eight percent over last year. That is the first time the supply of homes for sale has posted a year-over-year increase since June 2019.
Even with the increased supply, the number of unsold homes was down 3.9 percent. However, that is a significant change from the 10.1 percent of unsold homes the month before. Those figures include active listings and listings in the sales process.
Price Drops
“The picture of a softening housing market is becoming more clear, especially to home sellers who are increasingly turning to price drops as buyers become more cost-conscious under higher mortgage rates,” says Daryl Fairweather, chief economist for Redfin.
About one in five sellers dropped sales price during the four weeks ending May 22, reports Redfin. That is the highest level since October 2019.
The same Redfin report shows that activities that precede a sale have leveled off. Those include a home’s time on the market, the share of homes pending sale within one week, and the share of homes sold above list price.
Sales Decline
Home sales are down as a result of higher mortgage rates and decreasing demand.
New residential sales dropped 16.6 percent in April compared to March, according to the U.S. Census Bureau.
In addition, pending home sales dipped by 3.9 percent.
“Pending contracts are telling, as they better reflect the timelier impact from higher mortgage rates than do closings,” says Lawrence Yun, NAR’s chief economist. “The latest contract signings mark six consecutive months of declines and are at the slowest pace in nearly a decade.”
Conclusion
Higher mortgage rates are putting the squeeze on buyers as well as sellers. As a result, fewer houses are coming to market and fewer buyers can afford to buy them. However, those buyers who can make a purchase face less competition and may be able to negotiate a lower sales price.
Look for more of the same over the rest of the year as the Fed rate hikes push mortgage rates higher.
If You Are Waiting for Inflation To Peak – You May Have Missed It
You may not see it at the gas pump or the grocery store yet, but signs are emerging that inflation has peaked and is beginning what is expected to be a long slow decline.
Chances are, you do not follow international shipping rates. However, if you did, you would have seen a primary cause of inflation ease. The rate for shipping a 40-foot freight container dropped from $10,000 in March to under $8,000 this month, according to the Freightos Baltic Index. That index tracks shipping rates around the world.
Higher shipping rates typically propel inflation higher because they impact the cost of almost all goods.
Inflation Rate Slows
The Consumer Price Index (CPI) is often quoted as the measure of inflation. However, the Federal Reserve watches a different index. The personal consumption expenditure price index (PCE) is the Fed’s favorite inflation measurement. The PCE is considered more comprehensive than the CPI, partly because it reflects changes in consumer spending such as switching to cheaper products.
The PCE rose 6.3 percent year-over-year in April, according to the U.S. Department of Commerce. That is a decrease from the 6.6 percent rise in March, according to the Bureau of Economic Analysis. That was the first decline in a year and a half. In addition, the CPI dropped from a 40-year high of 8.5 percent in March to 8.3 percent in April.
Consumer Spending Holds Recession at Bay
Consumer spending has been an important factor in pushing back against inflation and the prospect of a recession.
For the fourth month in a row, consumer spending has exceeded the month-to-month rate of inflation, according to the report. In April, that spending rose .09 percent.
Savings Decline
One downside to consumers’ continued spending is that personal savings are declining.
Personal savings fell to 4.4 percent, according to the report. That is the lowest rate since 2008. However, Americans stockpiled $2.5 billion in savings during the pandemic. That could continue the strong rate of spending for some time.
Back to the Land
Ever dream of owning your own farm — growing what you eat and escaping frantic city life? Wake up, you probably can not do that. However, an increasing number of city dwellers are buying farmland and you can too.
The United States Department of Agriculture (USDA) found that 39 percent of the 911 million acres of farmland in the lower 48 states was owned by non-tenant investors. Of that, 50 percent of cropland is worked by tenant farmers.
There is a growing trend in farmland investing. Bill Gates and Warren Buffett have been buying thousands of acres for several years. However, you do not have to be an uber billionaire to buy agricultural property.
People of moderate means have been able to invest at little as $36 in a farm real estate REIT (Real Estate Investment Trust). Other investors are buying land through crowdsourcing
One company buying land for investment is Gladstone Land Company based in McLean, VA. Gladstone reported that, as of May 10, it owned 164 farms across 15 states totaling 113,000 acres.
How It Works
The investment concept is called a triple lease. Your money is used to buy farms. The land is then leased back to the farmer. In turn, the farm continues to work the land.
The farmer benefits by getting cash now for the land while being able to continue farming and maintaining a residence.
For investors, farmland can produce a rental income, but the biggest payoff is in land appreciation. As land prices rise so does the value of the REIT. Since most REITs are liquid, you can trade shares on a stock exchange.
Returns
AcreTrader is a crowdfunding platform for farmland investing based in Arkansas. It points to NCREIF figures that show an 11 percent return on farmland over the past 25 years
Indeed, land has always been viewed as a hedge against inflation and economic volatility. However, like all investments, there are risks.
Risks
Part of the return on agriculture is the sale of crops. To get the best return, crops need to be sold at the right time. That can be hit or miss.
The biggest challenge in bringing in a cash crop is the weather. A farmer can work hard and do everything right but the weather can wipe out a harvest. Too much rain at one point or too little at another can be disastrous. Wildfires and tornadoes can also decimate crops.
Interest rates can also hurt farm returns. Land prices tend to rise with inflation. However, the cost of supplies, such as seeds, fertilizer, and farm equipment are all subject to the ravage of inflation.
Conclusion
The watchwords for farmland investing are the same as for any investment — know what you are getting into. That means knowing the risks, what drives the return, and how to get out when you want to.
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Max K. Erkiletian began writing for newspapers while still in high school. He went on to become an award-winning journalist and co-founder of the print magazine Free Bird. He has written for a wide range of regional and national publications as well as many on-line publications. That has afforded him the opportunity to interview a variety of prominent figures from former Chairman of the Federal Reserve Bank Paul Volker to Blues musicians Muddy Waters and B. B. King. Max lives in Springfield, MO with his wife Karen and their cat – Pudge. He spends as much time as possible with his kids, grandchildren, and great-grandchildren.
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