Hi! If you don’t know me, I’m Pat Wilver, one of the co-owners of Trophy Point Realty Group. I’m writing today to share some 2022 statistics of the national as well as Savannah real estate market, and provide some context for those stats (and plenty of my own opinion as well). We sincerely hope that 2022 has been a great year for you and we cannot thank you enough for trusting us with your real estate needs.
I’d like to start off with the conclusion – I know some of you are very busy folks and like to cut right to the chase. In the year 2022, interest rates more than doubled from 3% to over 6% – this is the only thing that really matters right now. A house that used to cost $1,000 each month in mortgage payments now costs $1,430, and during October of this year when rates reached their high water mark of 7.3% that house cost $1,650 each month. Since the vast majority of home buyers use mortgages to purchase their homes, it’s logical that higher interest rates will reduce purchasing power, decrease demand, and lower home prices. Prices across the US have decreased over 10% from their peak in June of 2022, though prices for homes in Savannah GA remain largely unchanged from the peak of $300k in June of 2022 (we are currently at $290k for December 2022, and were at $299k in October and November). Interest rates have been falling since early November and are likely to continue to fall, but likely not below 5%.
It is my belief therefore that prices nationwide will likely remain unchanged through 2023, and may even increase slightly in the Savannah market because our area continues to enjoy job and population growth in excess of the rest of the nation.
You probably noticed how fast housing prices increased between 2020 and 2022. The rapid price increase we experienced is mostly due to one factor – the fact that the federal reserve bank suppressed mortgage interest rates to historic low levels in order to stimulate the economy. Spoiler alert: it worked. These record low rates made monthly payments more affordable and greatly increased demand in the housing market, which brought prices up. Once the Fed realized inflation was out of control, they then acted to increase rates, and this understandably had the opposite effect.
In early 2020, the average existing house in the United States cost about $300k to purchase. In June of 2022, the average US existing home cost $423k, and currently the average existing home costs $376k. The price increase to June’s highs was one of the fastest on record, and the fall since June was also rapid, though not too much more than seasonal decreases in housing prices (see chart below from mortgagenewsdaily.com)
Here’s an interesting takeaway from the chart above – July of 2022 saw the fastest monthly price decrease since 2012. This was also when mortgage rates topped 6% for the first time since October 2008. Now that interest rates are back to about 6% again and still decreasing, I believe that housing prices nationwide will stabilize in 2023. Housing prices tend to be sticky so it’s not easy for housing prices to come down. Why are they sticky? Well, if you bought a house, have a super low interest rate, would you sell for a loss if you don’t have to? Of course not – you’ll just rent it out instead. The reason that prices declined so much during the housing crisis of 2008 is that tons of folks were getting foreclosed on – they had to sell. Foreclosures are still very low today and likely to remain low because the vast majority of homeowners today do not have adjustable rate mortgages like they did in 2008. Their payments are very low and will remain low forever unless they refinance. The unemployment rate is still below 5%, nobody is getting laid off. There is no strong motive to sell, unlike 2008.
Now back to the interest rates. Do I think mortgage rates will continue to decrease? Yes. Why? Because inflation is decreasing, and as long as inflation is decreasing then the federal reserve will not be incentivized to keep raising rates. There’s a whole lot more to the interest rate equation than that, but that is a lengthy discussion and I think outside the scope of this letter. Below please find a chart of mortgage rates over the past year from mortgagenewsdaily.com:
I do think rates will stabilize between 4.5% and 5.5%. Why is this? Well, frankly, it’s hard to explain in a few sentences but I’ll try. I think this because the Federal Reserve has an inflation target of 2%, and a lender needs to make more than 2% on the rate or else they will effectively lose money. Long term U.S. treasury bonds also tend to hover around 2 or 3% as long as inflation is around 2%, and since lending money to the US Government essentially carries no risk at all, lenders will need a slightly higher premium to lend money to homeowners, who are slightly more risky than the U.S. Government. But they’re still not very risky borrowers, hence small premium of 1.5 to 2.5% on the rate. The premium on credit card debt is closer to 18% – it’s much riskier. Does all of that make sense? Maybe not – if you’re still confused and want to know more give me a call and I’d be happy to give you more detail. I love talking about debt markets.
You’ll remember that I said the Savannah real estate market is outperforming the rest of the nation. Why do you think that is? My opinion is this: Savannah’s population and market for available jobs continues to grow, we’re not building enough houses to meet this demand, and homes for sale in Savannah are still relatively cheap compared to the national average.
Look at tech hubs like Seattle, WA and Austin, TX. Both cities experienced remarkable home price appreciation between 2020 and 2022, and both have experienced worse than average home price declines since June of 2022. Additionally, the job markets in these cities are very tech sector heavy, and the tech sector is experiencing a lot more layoffs than other industries. Tech companies added many jobs as the pandemic kept people home (and online!), and cheap borrowing costs allowed unprofitable startups to maintain an unsustainable workforce. As soon as rates started to go up, those companies were forced to lay off staff. Additionally, many of these businesses are set up in a way that allows their workers to work from home – a computer programmer can work from anywhere. As housing prices in Seattle, San Francisco, and other high cost of living cities became unsustainable, a remote workforce started to look for cheaper places to live – Savannah among them.
Now – Savannah is not exactly known for its tech industry. We do logistics, manufacturing, and the military here and we have a growing film and education industry – and those jobs can not be done remotely. Have you driven down I-95, Dean Forest Road, 204, or any other major thoroughfares lately? Have you seen all the warehouses being built? Have you heard about Hyundai’s new EV plant being built in western Bryan County? Have you seen how many movie productions are coming to town? SCAD’s growth? Jobs, and people, are moving to Savannah faster than ever before, and for many of these transplants Savannah’s cost of living is still cheaper than where they came from (even though it’s expensive to those of us who have been here for a while!) This, more than any other reason, is why housing prices in Savannah have remained stable despite interest rates more than doubling. This is why I still believe the Savannah real estate market is still strong, is still a good investment, and it’s why I am still buying real estate here. Perhaps I am misguided, but at least I’m not telling you to do one thing and doing the opposite myself – I am a true believer and I’m a buyer. See chart below for Savannah metro area’s housing price trends over the past 5 years:
I could keep writing a few more pages of my thoughts, but we’re already close to 2,500 words and I’ve been told that it’s impossible to hold the average American’s attention for more than a few seconds at a time these days (thanks, Mark Zuckerberg!) In case you can’t tell – we love to talk about real estate. If you found this interesting and enlightening, please do not hesitate to reach out and continue the discussion by phone or over coffee or beer! As always, we are never too busy for our friends and clients, and we would be honored to have an opportunity to earn the business of your friends and family who need help with their real estate needs in the Chatham, Effingham, Bryan, and Liberty County areas.