What Do Rising Rates Mean for the Twin Cities Housing Market?

What Do Rising Rates Mean for the Twin Cities Housing Market?

How will aggressive anti-inflation moves by the Federal Reserve Bank impact the homebuilders and buyers? Centra Homes President Dale Wills shares his outlook.

As expected, the Federal Reserve moved aggressively to curb the overheated economy last Wednesday, raising the benchmark lending rate 0.75%.? By Thursday, mortgage rates were already on the move, logging a half-point increase in the latest Freddie Mac rate survey– the largest one-week increase since 1987.

The Fed’s action was an aggressive one, deemed necessary to curb runaway inflation numbers on the heels of the highest inflation numbers since 1981.? Experts anticipate additional hikes from the central bank in the coming months.???

What does all of this national news mean here in the Twin Cities???

Will this help tame the wild housing market?? Will the inventory pressures persist??

How should buyers and builders respond?

Having experienced a few ? economic cycles in the housing market, I wanted to share my thoughts.? First by tackling where we are today, analyzing the factors that led us here, and then sharing what we can anticipate next.

Today- Inflation Concerns Dominate

Material supply constraints and increases in construction costs have to date served as the dominant concern among builders and homebuyers alike.? Costs are rising almost across the board at precisely the time when housing inventory has hit historic lows.? This is the result of a strong labor market pushing wages higher and demographic and work trends leading many to explore suburban living.

Tactically this means more of what we’ve already seen:

• Increasing housing demand in suburban areas
• Reduced inventory
• Bidding wars and reduced buying power

The Forecast:

As homebuyers are increasingly forced to balance their desires with increased costs there will be two responses.? While some will be content to rest on the sidelines, many others will press forward, creating a surge in demand for transitional housing—smaller homes with reduced yard sizes along with single-level homes with more baby boomer-friendly amenities.

Tomorrow- More Rate Concerns

Highlighted by the Fed’s action this week, buying power concerns have risen to the forefront.? The very “medicine” experts say is needed to slow the overheated economy represents an increasing challenge for homebuyers.? The Fed anticipates additional rate hikes in the future to continue to try and manage the rate of inflation, so the trend is likely here to stay.

Tactically this means:?

• As rates increase, affordability will decrease
• Many move-up candidates will choose to stay put, further constricting housing supply
• ?A disproportionate number of first-time homebuyers will feel “priced out” of the market

The Forecast:

The so-called perfect storm of rates and inflation offers some predictable outcomes.? As rates continue to rise and supply remains constricted it will become a priority for many to act now.? This will lead to increased buyer interest in spec homes and homes available for sale now.? Overall rates, construction costs and affordability concerns will lead to a cooling of pre-sales and so-called “dirt sales”.

?What’s Next?

Every situation is unique, but market cycles in the homebuilding space typically follow trends.? Therefore, predicting the coming impacts requires the wisdom of experience.? Here is what we anticipate:?

• Housing supply in the Minneapolis/St. Paul market will remain low with many additional homes needed.
• Material costs will continue to be unpredictable
• Interest rates will reduce demand from certain buyer segments
• Continued demand for first time homebuyers and buyers requiring quick moves?

The Forecast:

While we are seeing some price relief for homes on the secondary market, this has largely not been the case in the red-hot suburbs.? Because of this strength, builders that have the ability will not slow supply any time soon.? Most will continue construction until current projects wrap up.? In short, affordability concerns will remain an issue for some time.

The Centra Commitment

At Centra we have always prioritized home ownership and affordability.? The reality of the housing market today demands action to ensure that we are helping with both.? To that end we are committed to continuing to fill the housing inventory pipeline with a focus on affordable and efficient homes.? This includes changes to our process to prioritize cost reductions along with adaptations to promote environmental efficiency and to meet the evolving needs of clients.? Market cycles change but our commitment to quality new construction homes will not.

Long term prospects for the Twin City suburbs continue to be incredibly positive.? While near-term challenges will likely persist, Centra remains committed to doing our part to address concerns.? Since 2011, we’ve partnered with thousands of homeowners to deliver affordable, quality new home construction. That commitment continues with new communities underway in St. Michael, Otsego, Coon Rapids and Hugo.? For information about any of our communities, visit CentraHomes.com.