JUNE NIBJ: A market trying to find its way

To fully understand today’s real estate market, you need a background in oil prices, the bond market, inflation metrics, and global trade fluctuations. Forget trying to figure out global war conflicts (Iran, Venezuela, Cuba, Ukraine-Russia ad nauseam).

There’s an expression “all real estate is local,” which is mostly true, but even here in isolated North Idaho, we are not immune to these forces. The Iran war is now in the third month, and it has disrupted global oil supply in a historic shock. The immediate effects are felt in gas and grocery prices, airfares, and any kind of manufacturing process that requires petroleum products. Other less-obvious immediate effects are the impacts on consumer sentiment and inflation.

The blockade of the Strait of Hormuz has prevented any of the Mid East oil producers (notably Saudi Arabia and United Arab Emirates) from ramping up production, leaving inventory drawdowns as a temporary relief valve. World inventory usage was down by almost 15% last month, to about 7 million barrels per day in April, but that’s still 2 million bpd less than demand. Commodity markets ruthlessly seek equilibrium, and it is the demand side that is now in decline: we are back to 2008 levels for oil consumption. Short term oil is now over $200 in Asia, and the two measures that are reliable trackers are up: Brent Crude could hit $150 and West Texas Intermediate is almost $100.

Even if the war was settled overnight, there will be lingering effects for months to come from this level of disruption. There are many commodities that drive the global economy, but the most significant is oil, and the effect on U.S. inflation metrics will keep the rate well above the Federal Reserve’s target of 2%. The focus on keeping inflation under control and the U.S. deficit of about $40 trillion makes the Treasury bond auctions more expensive. Since mortgage rates reflect the Treasury market, there will not be any rate reductions in the near term. Mr. Powell might be stepping down as the Fed Chairman next month, but his successor’s hands are tied: expect mortgage rates to remain in the 6.5% or higher range for the foreseeable future.

Second quarter is traditionally when real estate sales surge. There’s always been reliable spring growth. There are many more properties listed for sale right now than last year, giving buyers more choices and keeping sellers from over-estimating what their home should sell for. There’s even been price reductions for listings that have languished on the market. (Prices still need to drop another 15% to meet the buyer demand affordability calculus though). But any nascent recovery this spring has been nipped in the bud, with dismal results thus far deep into May. The last good quarter for healthy sales was Quarter I of 2022: that’s four years of the market drifting sideways.

A quick look at the MLS data shows about 160 listings available in the Sandpoint area: there are 18 properties under $500,000, and a median value over the entire set of $782,000. The search criteria was limited to a site area max of five acres, so that larger land plays were not reflected in the numbers. Eighty listings under $782,000 sounds like a lot of choices, but that’s not an affordable price for many Bonner County workers. Over the past twelve months, homes under $500,000 sold quicker (by about six weeks) over those priced above that $782,000 median. There’s no question the demand is there for the lower-price-point homes. For new construction, it’s trying to overcome the expensive input challenges of zoned land, sewer and water infrastructure, the time it takes to get the various permits, and construction costs that have made affordable so difficult. For existing homes, sellers will have to come to terms with dated product and deferred maintenance issues as these are reflected in gradually decreasing prices.

Raphael Barta is an associate broker with an active practice in residential, vacant land, and commercial/investment properties. He can be reached at [email protected].