Lake Tahoe Real Estate News
As we finish the last weeks of December 2022 in the Lake Tahoe real estate market, sales numbers have stalled due to rising interest rates. What is in store for 2023?
Interest Rates Dropping
News last week that the November inflation number fell again for the 5th consecutive month led the FED to raise its prime rate only 50 points. This is lower than the 75 rate point hikes of prior months. Also, since the beginning of November, interest rates were consistently adjusting down.
The Consumer Price Index (CPI) is the main factor in what the FED does with the prime rate. In June, 2022, it hit an all time high of 8.9% as the increase in prices over last year. By July, it fell to 8.48%, August 8.24%, and September 8.22%. Because the CPI was not adjusting down as fast as the government wanted, they began raising the prime rate 75 points in the fall. This, in turn, drove up mortgage rates, which stalled the market.
In October, the CPI had dropped to 7.7% and the good news for November was that it was down to 7.1%. In anticipation of this announcement, mortgage rates began dropping below the high 7% mark all through November. By December 14th, interest rates were down to 6.6%.
2023 Interest Rate Predictions
Last week, the FED forecasted a total three-quarter point more of rate hikes next year. This would bring the benchmark prime rate to about 5.1%. This is higher than what they predicted in September of a rate peak between 4.3% and 4.6%. Unfortunately, we can expect mortgage rates to be higher in 2023.
In response to the lower interest rates offered by lenders in the last 60 days, mortgage applications rose 3%. While rising interest rates are keeping some buyers from entering the market, others are choosing to work with the rates that are currently being offered.
Home Values Lake Tahoe
In terms of home values crashing like they did in 2008, that is not happening. The changes in our current market are a completely different scenario.
Last year, demand had been incredibly strong, while supply evaporated, which turned the market in the seller's favor. Home prices escalated, but a lack of affordability combined with higher borrowing costs cooled the market. Unlike 2008, inventory is not flooding the market causing a plummet in prices.
Inventory is rising, but only to normal levels. The supply-demand imbalance drove the median home price upwards of $400,000 nationally and over $1 million locally. By June, there was barely a month's supply of inventory available. Compared to pre-pandemic numbers of 6 month supply, that is where we have settled today.
Loan Limit Increases
Because home values are still high, the government announced an increase in the baseline limit for FHA and Fannie/Freddie backed loans. It was increased 12% to match the 12% rise in home values over the last 12 months. Most areas of the U.S. can now get a loan with a $726,200 limit.
In El Dorado County, the FHA Limit and Conventional Loan limit for 2023 rose to $1,089,200. In Nevada County, the FHA limit is $644,000 and Conventional Loan limit is $726,200. In Placer County, the FHA and Conventional limit is now at $763,600.
Demand Still Strong
Because new home builders had pulled back after the 2008 subprime crisis, Freddie Mac in 2020 found that the U.S. was short 4 million homes. In California, we were short about two million units. It is estimated that to satisfy pent-up demand and meet the needs of a growing population, California needs to build 3.5 million homes by 2025.
The housing supply is still low and builders are pulling back. This means that values in the resale market won’t be crashing anytime soon. Values will not rise as aggressively as they did over 2022, but they won’t be dropping either.
We hope that the higher loan limits, the smaller FED hikes and a real estate market that is more balanced will lead to more sales activity in 2023. Buyers may have to come to terms with where interest rates are settling and get a bit creative to make higher borrowing costs work.
Sellers and Lenders Negotiable
Some sellers are incenting buyers with 2-1 buydown programs offered by lenders. Paying points in advance, the buyer can have a 2% rate reduction the first year and a 1% rate reduction the 2nd year. By the 3rd year, they can refinance after seeing where rates settle.
Of course, as more buyers come back into the market, lenders and sellers will not be as negotiable. If rates go above 7% in 2023, December 2022 may be the sweet spot for moving forward to buy your dream home.
If you are thinking of buying or selling your home at Lake Tahoe, contact me today for more market information.