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C-Suite Commentary by Michael D. Traveller


C-Suite Commentary by Michael D. Traveller

Housing Market Concerns

The housing market continues to be a hot topic nationally. To better understand the current market conditions, it is important to recognize the Federal Reserve’s role and intentions. The Federal Reserve’s goals are to keep prices stable and achieve maximum employment. It uses short-term interest rates to help reach its goals, which influence the availability and cost of credit in the economy. The Federal Reserve monetary policy directly affects interest rates; it indirectly affects housing inventories, stock prices, wealth, and a variety of other things.

The impact on housing inventories has been more dramatic recently for the following reasons:

  • 10 years of historically low interest rates followed by some of the most significant interest rate increases – in terms of magnitude and pace – that we have ever seen.
  • Many homeowners upgraded their housing or refinanced existing mortgages in the historically low interest rate environment - giving them less of a reason to look for a new home.
  • Some homeowners are now held hostage by their low-rate mortgages and cannot afford to upgrade their housing in the current environment – leading to fewer existing homes on the market.

Further, as a point of reference, there is almost a 3-percentage point differential between interest rates homeowners are paying now compared to what they would pay at the current market rate. Using this in an example, on a $400,000 30-year, fixed-rate mortgage (FYI - the January 2024 median home sales price in Idaho was $447,600), the difference in the monthly payment would be an additional $735 per month!

Also impacting the current housing market – lower home inventories leading to higher prices and fewer existing home sales. Existing home sales are currently below the 34-year average by approximately 20%, and new home sales have just recently returned to the 34-year average. With extremely low home sales inventory and the supply of new homes unable to fill the gap, demand will continue to outpace supply and put pressure on home sales prices. This is a real problem for affordable housing. According to a recent study by the National Association of Realtors, housing affordability declined to its lowest levels on record.

So, what are the solutions to these complex housing market problems? There are no magic pills or quick fixes. These are complex issues with a variety of moving parts. But housing markets, like most markets, are cyclical, and as with most cycles, time heals wounds. Interest rates will come down as inflation comes down.

Another possible solution to watch over the next few years is demographics. Baby Boomers make up almost 40% of total homeowner households. Homeownership rates tend to increase as households age, then gradually decline as households age beyond age 75. The youngest Baby Boomers will turn 60 this year. Another group to watch is Millennials – the largest demographic. Millennials will be turning 28 to 43 this year and many will be looking to buy homes over the next 10 years.

Headshot photo of Michael D Traveller.

Michael D. Traveller
First Federal Bank Chief Financial Officer