Over the last couple of years, housing markets nationwide have been a bit of a rollercoaster ride for investors. The Covid-19 pandemic pushed a lot of first-time homebuyers to enter the market as interest rates hit record lows, causing booms in markets that had previously been considered affordable. As the pandemic has brought on persistent supply chain issues and labor restrictions, the gap between supply and demand for single family homes initially widened, driving up housing prices. Coupled with rapidly rising mortgage interest rates in response to inflation brought on in large part by pandemic stimulus, those once-eager homebuyers are now being priced out of the market. This is resulting in widespread housing price cuts in some of the hottest markets.
Have Rising Interest Rates Broken the Camel’s Back?
When interest rates were at record lows, many homebuyers were more easily able to justify paying premiums on homes. Since the beginning of 2022, however, 30-year mortgage rates have doubled, driving up the cost of monthly installment payments, making it much more difficult for prospective buyers to justify many purchase prices. According to Realtor.com, active inventory is up 28% year over year due in large part to this fact, which has led many sellers to decrease their asking prices as their properties remain on the market for longer periods of time.
While this may be a tough pill to swallow for those who bought at peak prices, it does signal an overall positive shift away from aggressive competition seen throughout 2021. Investors can expect good deals to be a little bit easier to find, even with heightened long-term rental loan interest rates.
The Hottest Pandemic Markets are Cooling Fastest
As renters fled high-cost cities like San Francisco, New York, and Los Angeles, smaller and more affordable cities saw huge spikes in housing prices. Now, however, increasing numbers of sellers are dropping their prices. According to Redfin, the following cities have seen the largest percentage of sellers dropping their prices as of May 2022:
- Provo, UT (47.8%)
- Tacoma, WA (47.7%
- Denver, CO (46.9%)
- Salt Lake City, UT (45.8%)
- Sacramento, CA (44.3%)
- Boise, ID (44.2%)
All of these areas have seen median sale prices increase between 43 and 67% from May 2020 to May 2022, so it makes sense that these markets are being hit hardest on the back end of the booms.
For comparison, the city of Baltimore has seen a 23.7% increase in median sale price between May 2020 and May 2022. During May of 2022, 37.5% of listed properties adjusted their asking prices lower.
What Does This Mean for Investors?
For some investors who purchased while prices were at their peak, this may not be welcome news. We covered this last month when we discussed signs of the housing market cooling down, but for those in the midst of a fix and flip project, this could mean that ARVs will be adjusted lower, bringing slimmer profit margins (or even losses) to projects currently underway. In some cases, this could mean that foreclosure is more likely, especially when above-market offers were made while using leverage to fund purchases. If investors are unable to flip houses to cover their project costs and do not have the liquidity to cover these losses, there may be a rash of foreclosures in the near future. Otherwise, for investors who may have sat out for a little while, now would be a better time to consider new deals as prices are falling from their peaks.
As always, if you’re considering an investment opportunity, Pimlico Capital’s loan origination team is standing by waiting to hear from you! We’re always happy to walk through numbers to see if you have a good deal in front of you – feel free to fill out our online rate calculator to see terms that you pre-qualify for, or give us a call at 410-855-4600 to discuss specifics today.