Where to now: Interest rates, inflation and the housing market?

             As the housing market explodes with demand and tight inventory, the natural question arises of whether this is another housing bubble like the one that popped in the “Great Recession.”
            Some of the supply and demand factors are similar although inventory during the earlier pre-recession pricing boom generally remained higher than today in most areas of the country, including Bend and the rest of Central Oregon.
            Another key difference is that lax lending standards have largely disappeared with many buyers in today’s market coming in with all cash or solid loan prequalifications.
            Interest rates may be playing a larger role in today’s housing trends than in the previous boom and bust cycle.
            In the runup to the 2008 housing market peak and collapse, 30-year fixed rate mortgage interest rates averaged 6.34% in 2007 and 6.03% in 2008 according to charts of the federal FreddieMac database. Over the decade ending in 2020 rates fluctuated in a range from mid to higher 3% to 4%.
            As of May 13 this year the Bankrate benchmark survey of the nation’s largest mortgage lenders showed the 30-year fixed mortgage rate at 3.050% with an APR of 3.270%
            On May  12 the Dow Jones Industrial Average fell more than 600 points and the S&P 500 Index dropped a proportionate percentage, before rebounding to recover about two-thirds of the losses by the next day’s market close.
            Much of the drop was attributed to a rise of 0.8% in the April Consumer Price Index, the most in a single reporting period for more than a decade and 4.2% above April 2020. That raised concerns of rising inflation with government stimulus spending and a recovering economy. There’s apprehension this could in turn force the Federal Reserve to back away from its prolonged pattern of “quantitative easing,” or lower interest rates.
            However, barring a major shift in the Fed policy it doesn’t appear likely that gradual increases to tweak inflation fears would significantly blunt the continuing demand for housing. One analysis is that the largest segment of the CPI price increases was used cars and trucks, spurred by computer chip scarcity holding back new car sales.
            Another factor, the thinking goes, is that the dramatic upswing in new housing prices is-- besides pandemic demand--also due to pandemic related timber harvest and mill operation reductions pushing lumber prices to new levels.
            A local and regional snapshot is available from statistics provided by Beacon Appraisal, and derived from the MLS of Central Oregon database.

            At the March 31 end of the first quarter of 2021, only 61 single family homes on less than an acre were listed in all of Bend and outlying areas of Tumalo to the north and Alfalfa on the eastern edge. That translates to less than 0.30 months inventory.
            Another way of parsing the inventory is to translate the low inventory of listings to the pace of sales as determined by the time a home is on the market. Consider that most homes in the Bend area have gone from listing to pending sales in barely four days for the past four months.
            At the end of the Q1 2021, the median price for a single family home on less than an acre in Bend that sold in March was $590,000, more than 28% higher than the same month of 2021.
            For the period from March of 2018 through May of 2020 monthly median prices had held in a range from a low of $415,000 in May of 2018 to a high of $475,000 in August of 2019.
            Then came what might be logically called the “pandemic inflection point,” as the May 2020 median price of $445,000 jumped to $529,000 the next month, hit $560,000 in October, dipped to $524,000 in December and rose to $580,000 in January this year.
            When calculated over a 12-month period ending in March, the median price was $535,000, an increase of 16% over the $460,000 median for the 12-months ending in March of 2020. A comparison of median prices for the first quarters of 2020 and 2021 shows a 26% increase from $460,000 to $580,000.

            For April this year the Bend median hit $590,000 according to statistics in the Beacon Appraisal report. In emailed comments, Beacon’s Donnie Montagner noted that 40 of the 236 Bend sales in April closed at $1 million or higher, or 17% of the total. That compared with April 2020 with only 10 sales over $1 million out of 146 closings, or 7%.
            “After reviewing the data several times, I noticed the median was heavily influenced by the number of sales in the 1Mill+range, which had increased significantly," Montagner wrote.
            Nevertheless, he explained, “While sales in the (million plus) range have an impact on the median, the overall SFR (single family residential) price trend in Bend is significantly trending upwards when compared to the past several years.”
            The housing demand has veteran brokers competing for scant inventory. After capturing a listing the frenzy usually begins with multiple offers, often above the listed price. That in turn has given rise to “offer review days,” often only several days after a home is posted on the MLS. In many cases those offers are in hand even before the listing is known to the general public.
            More  often than not the offers are all cash, with no financing contingency. And even with the financing contingency the offer will likely have to substantially top others to even be in the running.
            Another trend has been a decrease in contingencies for inspections – with some buyers willing to take the risk that a problem may require additional investment, rather than be left in the cold in a hot market.
            Driving the housing market for at least the near-term could the delicate balance of consumer response to current low interest rates against potential higher rates resulting from rising inflation—along with uncertainty over the choppy economy as it emerges from a tough stretch.