Happy Holidays from all of us at Wolfnest! It’s truly amazing how quickly a year goes by and just how much change we can see in that relatively short period of time. Last December, home values and rental rates were soaring along with the job market and homebuilder sentiment while everyone was concerned about the Omicron variant of COVID-19. This year, it’s mostly the opposite as home values and rental rates are correcting, homebuilder sentiment is at a 10-year low, and COVID concerns have mostly eased. The job market is still strong, but we now have a new headwind in the form of high inflation. In this months update, we will explore an old strategy that might help today’s buyers, launch our new “Utah Rent Report”, and discuss a potentially disruptive industry lawsuit.
November Jobs Report - Last month, the U.S. Economy added 263,000 jobs and the unemployment rate held steady at 3.7% against expectations of only 200,000 jobs added and no change in the unemployment rate. In other words, economists keep expecting the Fed’s cooling measures to have a more profound impact on the job market than we’ve seen thus far. However, we are starting to see mixed signals as employers are becoming more cautious with hiring, certain industries like tech are experiencing massive layoffs, and revisions to September’s and October’s employment numbers (Down 46K in September and Up 23K in October) make Novembers total the fewest jobs added since April of 2021. With that said, it will be interesting to see how much longer the job market remains strong in the face of drastic action from the Fed.
Weekly Jobless Claims - Weekly jobless claims saw a modest increase for the week ending December 3rd with 230,000 new filers. That’s only 4,000 new filers above last weeks total so the labor market remains strong despite growing fears of a recession. Continuing claims climbed by 62,000 to 1.671 million, which marks the highest number we’ve seen since February. It’s important to remember that this could be an early indication of a loosening labor market or simply a seasonal fluctuation as many workers don’t look to start new jobs around the holidays. Locally, Utah saw a 67% jump in new filers from the previous week for a total of 2,257, so labor market volatility will be something to keep an eye.
November CPI - November’s Consumer Price Index data won’t be released until next week on the 13th of December. Policy makers will be looking for a continuation of October’s good news that inflation was coming down faster than expected. To recap, we saw a 7.7% increase in prices year over year and 0.4% increase month over month against expectations of 7.9% and 0.5% respectively. We will keep our fingers crossed that the pace of inflation will continue to decline and encourage the Fed to reduce or eliminate future interest rate hikes. See below.
Smaller December Rate Hike? - Last week, Fed Chairman Jerome Powell announced that smaller interest rate hikes are likely moving forward, adding that a lower hike could be the case as soon as this month. He did hedge his comments a bit by saying that “we will stay the course until the job is done” indicating that restrictive monetary policy will remain the norm until we see real signs of fading inflation. Regardless, markets cheered the news, and assuming we receive good news with next week’s CPI report, everyone seems to be expecting a 0.5% increase when the Fed meets on December 14th.
Buying Property in a High Interest Rate Environment
I realize that it’s much closer to Christmas than Halloween, but I’m about to tell you a real estate horror story. It’s an old story, taking us all the way back to October of 1981, but it’s a tale that any modern day buyer taking out a mortgage with a 7% interest rate can certainly relate to. Just over 41 years ago, 30-year fixed rate mortgages sat at a ghastly all-time high of 18.63%. That is not a typo. In the inflation driven and credit squeezed insanity that was the early 1980’s, that era’s mortgage interest rates looked a lot like what you’d see today from a credit card or pay day lender. To put this difference into proper perspective, your payment on a $500,000 30-year mortgage at 7% is $3,327 per month (excluding taxes and insurance). That same loan at 18.63% will cost you more than double every month at $7,793. Ouch. Of course, back in those day’s a typical home cost just over $70,000, but you get the idea.
I dug up this spooky story in search of solutions to the challenges brought on by today’s high interest rate environment. If people could buy and sell houses in that market, then certainly it’s possible today. So, how did sellers attract buyers when money was so expensive? The answer is they got creative. A combination of assumable mortgages and creative financing vehicles such as a contract for deed or wrap around mortgage allowed buyers and sellers to facilitate transactions that would have otherwise been impossible. In such an arrangement, a buyer would assume the sellers say 8% mortgage, and the seller would lend the difference in purchase price between the loan balance and the home’s market value in the form of a promissory note. The buyer then makes payments on both the original mortgage and the note. It was the ultimate win-win. The seller was able to unload the property while the buyer received better terms than they otherwise would have. It was so popular that a 1981 Washington Post article estimated that more than half of all home resale transactions were facilitated using creative financing techniques.
Fast-forward to today. Can real estate investors use these same strategies in search of investment opportunities? The short answer is yes, but it won’t be quite as easy now as it was back then. In the 1980’s, assumable mortgages were everywhere, but the rise in creative financing strategies effectively cut traditional lenders out of the resale market. Yes, they still had their outstanding loans, but they were no longer originating new loans at the higher interest rates every time a property changed hands and that cut into their profits. As a result, only a small subset of mortgages are assumable today. Government backed mortgages (FHA, VA, and USDA), which made up 18% of new loans originated in Q2 of 2022, are assumable but have strings attached while most conventional loans are not assumable because they contain a due on sale clause. Also, some adjustable rate mortgages may also be assumable if specific financial qualifications are met.
Despite these challenges, the combination of assumable mortgages and creative financing techniques can be a useful tool for real estate investors looking to add to their portfolio as interest rates rise. Be sure to consult a real estate attorney who specializes in these kinds of deals (we have referrals) if you wish to explore this option, but it just might be worth asking the seller if their mortgage is assumable the next time you go house shopping.
Utah Real Estate Market
In November, the recent real estate correction continued with the median sold price of a single family home in Salt Lake, Utah, or Davis county falling 3.5% to $550,000. The number of completed transactions also fell 8.3% to a yearly low of 1,111 deals completed. Alternatively, inventory levels dipped to a two month low of 5,754 as some frustrated sellers are taking their homes off the market entirely. By this point, it shouldn’t be a surprise. Utah’s once red hot real estate markets is quickly cooling as high interest rates have dramatically slowed mortgage demand. This reality is certainly frustrating, but a dose of perspective might help. While Morgan Stanley is predicting a 10% decline in national home values from June 2022 to 2024, it’s important to remember that home prices climbed 45% from December of 2019 to June of 2022.
Median Sold Price*
Average # of Listings*
Monthly Change: Down 3.5%
Monthly Change: Down 8.3%
Year Over Year: Down 43.2%
Monthly Change: Down 4.7%
Year Over Year: Up 239%
* all graphs/data are for single-family homes in Salt Lake, Utah, and Davis Counties.
Utah Rent Report
Rental prices continued their recent downward trend in November as more and more renters anticipate a recession. The decline in the pace of climbing rents, which hit an 18 month low, is the expected result of a market responding to record inflation. On the positive side, Rents are still up significantly year over year across every local city we track but the days of just throwing out a price and getting it are over.
Month Over Month
Year Over Year
North Salt Lake
Salt Lake City
*Pricing data provided by apartment list.
Real Page Pressured About Pricing Algorithm - A recent article in ProPublica, has called into question the practice of offering a pricing tool to landlords that utilizes the company’s vast amount of pricing data to make algorithmically generated rental price recommendations. The concern being that these recommendations facilitate price fixing in violation of antitrust laws. So far, lawsuits have been filed in Seattle, class action pressure is mounting, and investigations are being called for by members of the U.S. House of Representatives. This will be an interesting situation to monitor as it could have massive implications for how rental operators are allowed to use data to price their rentals.
Eviction Moratoriums Have Big Impacts on Small Landlords - A recent story from the NBC affiliate in Los Angeles shows the double edged sword that is eviction moratoriums. While a great way to protect vulnerable tenants from eviction during the pandemic, eviction moratoriums have been extended in some markets and this has put small landlords in the highly unfair position of being required by law to offer what amounts to free housing. It’s important to remember that not every landlord is a massive and faceless corporation with billions in revenue and not every tenant is a victim of circumstances beyond their control. As with most things in life, a delicate balance must be struck to ensure that legislative policies protect everyone who might be vulnerable.