When I look at real estate sales volumes in Santa Fe for the last 10 or 12 years, the first thing that comes to mind is that the Fed has done a pretty damn good job slowing things down. And this is meant only partially tongue in cheek.
If we’re looking at all types of sales (single-family homes, condos, raw land, etc.), 2023’s total number of transactions settled at 3,149, versus 4,766 in 2021, the peak year, when rates were still ultra low.
When people as me “How is the market?” I often respond by saying, one way or another, “smaller.” Normally that gets a somewhat perplexed look. Then I explain by saying that the market is about 65% the size it was at the 2021 peak. To be precise, volumes (again, the number of transactions, not the dollar volume) for 2023 were 66.1% of the 2021 peak.
The fact that the Fed has managed to slow things this dramatically without, so far, causing some form of distortion to enter the markets is a good thing, and fundamentally, the Santa Fe markets are, ironically, quite healthy.
Looking at residential sales only, the numbers look similar, with 2023’s volume of 2,496 transactions versus 2021’s 3,769 showing a similar drop of 66.2%. As importantly as the magnitude of the drop the Fed managed to engineer is how long it’s been since sales volumes in Santa Fe have been at these levels: roughly speaking, sales volumes are at the same levels they were 10 years ago, in the 2014/2015 time frame.
In the chart below, 2023 is to the left and 2006 to the right.
Much as many of us who have experience in the investment management business like to malign Jerome Powell (mostly for his pretty terrible communication skills), the Fed’s having been able to orchestrate a slowdown of this magnitude without breaking things is pretty remarkable.
Land sales may prove to be somewhat exempt from this pattern, because bare lot sales have begun to climb due to the demand for new homes having climbed to fill the supply gap of existing homes, which, as everyone now knows, is severely constrained by homeowners with cheap mortgages wanting to stay put so they can hang on to their cheap mortgages. In my view, this supply constraint is not likely to change materially unless mortgage rates drop to the 5.00% to 5.50% range, which I don’t see as likely. Subject to constraints within Santa Fe regarding new-home construction, lot sales volumes will likely continue to climb, bucking the overall trend.
Many pundits (Nobel Prize winner Paul Krugman among them) have pronounced the inflation fight over (and in substance, it is) but with the U.S. economy still screaming along as it has been, short-term rate cuts of any significance (more than 75 basis points or so) seem not to be in the cards, and mortgage rates will likely remain in their recent trading range.
The constraint in supply, of course, is driving the steady price increases we’ve seen in Santa Fe, perhaps a topic for another post. Seeing price increases while volume has been cut by 35% is indeed anomalous. But as long as a vast pool of cheap mortgages exists for homeowners to sit on, price increases will continue. Overall, the Santa Fe market is smaller but quite healthy. When we burn through the pool of cheap mortgages and unlock significant supply, things will get very interesting.
Leave a Reply