Cost of homes and interest rates increase as inventory remains low
Mar. 18—High interest rates. Inflation. Low inventory and wealthy out-of-state competitors.
Home prices remain high in the Albuquerque metro area for various reasons. However, Realtors and homebuilders said the housing market remains strong.
"I feel like there's this pent-up demand that's going to have to shift at some point, because for over a year now, (we've seen) interest rates going up, and then on top of that our historically low inventory," said Morgan Cannaday, president of the Greater Albuquerque Association of Realtors Board of Directors. "It's really tough for buyers in this market right now just because the higher interest rates are going to reduce their buying power and how much of a house they can afford."
Cannaday said many potential buyers instead are opting to stay in their homes until the market shifts and there is more inventory to choose from.
"Since the beginning of the pandemic, we've had such an inventory shortage to where there is enough buyer competition that it's frustrating for a potential homebuyer when they're having to compete with other buyers for homes and they feel like homes are selling for more than what market value is or should be for that home," Cannaday said. "It's definitely discouraging for buyers."
The situation is a bit of a Catch-22.
"What we're seeing right now, because you have homeowners that would ideally like to either downsize or just their families are growing and they need to find a bigger house, or move to a different area of town," Cannaday said. "But then they see the lack of options on the market, so they're choosing not to sell their current home and buy something else, which means that their current home is not available for another buyer to buy."
In February, there were 846 detached homes listed in the Albuquerque metro area, which includes surrounding communities like Corrales and Rio Rancho and most of Valencia County. That was up more than 100 from the 739 new listings in February 2023, according to GAAR.
The average sales price for a detached home last month was just less than $390,000, which was up from $365,000 a year ago.
Despite the inventory being low, Cannaday feels "strongly" that now is a great time to buy.
"We are still in a healthy market, meaning that none of the data is indicating that we're going to have some massive crash anytime soon, values are still projected to increase," Cannaday said. "Therefore, it still makes sense as a good investment."
She stressed that a potential buyer should enter the market with patience. Because of relatively low inventory and competition, it could be frustrating if a buyer expects to purchase a home quickly.
"But if they are patient, and they have the time to hold off until the right home comes along, now is still a really great time to buy," she said.
New Mexicans also have had to compete with out-of-state buyers who can pay cash. Realtors reported that families from California, Texas, and other parts of the country have relocated to New Mexico when they see a $350,000 home for sale in New Mexico, which is a fraction of what they would otherwise pay in their home state.
"With them having cash and being like, we'll waive appraisal and pay $50,000 over, that's what hurt locals more than anything over the last few years," said Liska Maddox, associate broker for Maddox Management LLC. "But these interest rates going up have kind of helped buyers. It brought down their buying power, but the thing is, they needed this cash to beat everyone else out because of the bidding wars. Now they don't have to go over asking price. They don't have to waive appraisals, They don't have to agree to the house as is. There's more negotiation power for buyers currently than there was over the last few years, when interest rates were at 3%."
Maddox said a 6%-6.5% interest rate is not unreasonable.
"People have to remember that the normal is 5-6%, the 3.5% was the anomaly," she said. "I don't know if we'll ever get back down to those interest rates. I feel like the normal is probably going to be closer to between 5% and 6%, which historically, that's been the rate."
Brian McCarthy, co-owner of local homebuilder Abrazo Homes, said the market remains strong.
"I think there was a period of time where buyers were waiting," he said. "They were waiting to see if the increase in interest rates really would correlate to a drop in prices. And, now we're coming up on basically the two-year mark of a higher interest rate environment, and the prices haven't dropped. So now, I think that's really just created some pent-up demand."
Abrazo Homes, as well as some other builders, reported "really strong" February sales. The new-home market is doing well, according to McCarthy.
Inflation, however, is driving up the cost of the materials needed to build a home.
"We're still going out to buy the materials for the new homes that we're going to build and inflation is still positive, right?," he said. "I mean, the pace of inflation is coming down. But it's still costing us more to buy the materials that are going into our houses today than the houses that we were building two or three years ago."
Most of the development activity occurring in the Albuquerque metro area is taking place in Rio Rancho and Los Lunas. However, some areas also are being developed in Albuquerque, despite it being boxed in by the Kirtland Air Force Base, the Sandia and Manzano mountain ranges, and the pueblos, including Isleta, Sandia and Santa Ana. An exception is Mesa del Sol.
"Mesa del Sol has been a great community for us," McCarthy said. "And we're developing a new phase. There's about 170 lots being developed right now that are coming online late this summer."
Mesa del Sol has seen housing and employment growth that partly can be attributed to Netflix.
"There are a couple of other projects that are on the horizon I would say that could help to open up housing supply in the city limits of Albuquerque, but we're seeing a lot of growth," McCarthy said. "And we are seeing a lot of expansion in both Los Lunas and Rio Rancho."
Canaday said GAAR is working with industry partners to improve market conditions. For example, she said the association is trying to work with lenders to create lending programs for first-time homebuyers who are feeling discouraged with what they can afford based on current interest rates.
"We're starting to see that shift a bit where days on market, the amount of days it takes for a home to sell, has increased our absorption rate, as far as month supply on the market, is starting to increase as well," Cannaday said. "Inventory is starting to tick up a bit, but we are nowhere near what would be considered a stable market. We're at 1.5 months of inventory, whereas a stable market would be five to six months of inventory."
Not all hope is lost for New Mexico buyers, according to Maddox.
"Lenders still have a lot of great programs for first-time homebuyers and down payment assistance. And, they can get (New Mexico Mortgage Finance Authority) financing, she said. "... There's a lot more options, and I think it's gotten easier on first-time homebuyers in the last year than it was in 2021, 2022. It's been a better buyers market for sure."
McCarthy's advice to buyers is "marry the house and date the rate."
"It's this idea that interest rates are temporary, meaning, right now, you might be buying a house today that would cost you a little bit more than you anticipated," McCarthy said . "If you're buying today at 7%, that might be a couple $100 a month more than you were hoping to spend. But, assuming that we kind of get back to equilibrium interest rates, we expect to come back down by some factor. And if you're able to refinance a year from now or two years from now and you're 5% or 5 1/2 %, you're still in the house that you wanted, but you're able to basically reset the interest rate and reduce that lower payment.
"Our fear is, if you wait, so to speak, that you might not be able to afford the house two or three years from now, at some point in the future, because the prices have remained very strong."