Shopping for a home? Experts say don't give up hope

Scott Meyer, a loan officer for Benchmark Mortgage in Grand Forks, North Dakota, thinks 2024 will be a strong year for first-time homebuyers, but finding that house could be a challenge.

“Lack of inventory is a major concern,” he said in late February.

A lock-in effect is part of the lack of housing. Homeowners who had previously refinanced their mortgages at lower interest rates are seeing higher rates and prices today and are not willing to jump into a higher interest rate to purchase a new home.

“Those folks just aren’t putting their homes on the market,” Meyer said. “What we’ve seen is that inflation is not under control.”

Although still on the high side, mortgage rates have dropped significantly from their peak last fall, and homebuyers are beginning to come out of the woodwork, with the National Association of Realtors forecasting a 13% increase in existing home sales this year compared to 2023.

On Friday, March 8, a 30-year fixed loan was at 6.85%, a drop of 0.07%, and a 15-year fixed was at 6.39%, a drop of .05%. A 30-year VA loan was at 6.4%, a drop of 0.11%.

"The latest data on inflation was not markedly better nor worse than expected, which was enough to bring mortgage rates down a bit, with the 30-year fixed mortgage rate declining slightly last week to 7.02 percent,” Mike Fratantoni, Mortgage Bankers Association senior vice president and chief economist, told Mortgage News Daily. “Mortgage applications were up considerably relative to the prior week, which included the President's Day holiday. Of note, purchase volume – particularly for FHA loans – was up strongly, again showing how sensitive the first-time homebuyer segment is to relatively small changes in the direction of rates. Other sources of housing data are showing increases in new listings, which is a real positive for the spring buying season given the lack of for-sale inventory."

As a loan officer, Meyer says mortgage loan rates are one part of the equation he talks about when advising clients.

“I’ll show them where it’s been and where it’s sitting. I want to focus on the payment-debt strategy and financial freedom. Right now, sellers probably have multiple offers due to lack of inventory,” he said.

He’s seeing more lake properties being listed now, which could be due to financial restraint. Property values continue to rise, which creates a unique situation, Meyer said, and suggests many people could be waiting for spring to list their homes.

“In 2023 we had a downturn. It was a 30-year low for home sales in the country. Grand Forks has a unique thing with job creation, Grand Sky and the airmen at the Air Force base," he said. "We have some unique situations here that incubate us from that.”

Loan applications have started to increase in the past few weeks, he said, and the biggest issue for the housing market is just needing more homes to become available – not just in Grand Forks, but across the country.

Vicki L. Fisher, community development director for Rapid City, South Dakota, agrees. She said building permit numbers are healthy in her state. The city issued more than 27,000 permits with a valuation exceeding $463 million, surpassing the previous record set in 2022 by more than $100 million. Part of that is increased construction costs, but continued growth is the driving factor.

“Rapid City is experiencing growth beyond typical growth patterns. The economy is solid, the location is beautiful and the quality of life is high. Many new businesses are coming in and that generates a demand for housing,” she said.

Although the city is seeing an increase in the number of apartment projects going up, there’s a decrease of 14% in the number of single-family homes and townhome projects.

“It appears that the growing cost of construction along with high-interest rates to secure a mortgage have deferred some potential homeowners to stay as renters until the market right sizes. Many are deciding to stay in the homes they’re in or even waiting to downsize until their money will buy more,” she said.

Because apartment projects are commercial loans, the interest rates aren’t the deterrent they are for home mortgage loans, she said.

Rapid City’s biggest industry is tourism and it has become a mecca for shopping. In a five-state area, the city of about 80,000 is the largest city in the region and the retail outlets are very successful, Fisher said.

Ellsworth Air Force Base is located about 10 miles outside of Rapid City, and is doing a large expansion for the new B-21 bomber planes, which means more military families coming to town. In 2022, the base had about 5,600 service members, family members and civilian workers connected to it. That population is expected to grow by 3,000-5,000 once the B-21s arrive.

A proposed theme park and resort – Libertyland USA – has been approved, which will have large housing and RV components, Fisher said. The first phase of that project should be completed in 2026.

All of this growth will require additional housing for the workforce the industries bring. But not everyone wanting a home can qualify for a loan.

The National Association of Realtors hosted a policy forum in February to come up with ways to keep homeownership within reach. In a panel discussion about meeting housing supply challenges, JP Delmore, assistant vice president at the National Association of Home Builders, said the Neighborhood Homes Investment Act can lower barriers to new construction.

"It is one approach to attempt to solve some of the financing problems that are out there. It is a bill that has a tremendous amount of bipartisan support," he said.

Delmore noted that 70% of U.S. housing is completed by builders who qualify as small businesses. "So, looking at housing development and potential tax incentives, it has to be something that's also accessible to a small business that may have five employees," he said.

Delmore said more legislative solutions, specifically governments speeding up zoning and the approval process, could help. "About 25% of the cost of a new single-family house is due to regulation, and on the multifamily side, it's nearly 41%,” he said.

The Realtor Association of the Sioux Empire (RASE) in South Dakota reports for February , new listings in the Sioux Falls region increased 10.9% to 456. Pending sales were up 20.8% to 267, and inventory levels rose 6.3% to 1,236 units.

Sioux Falls area Realtor Melissa Merchant, with Merchant Home Group - Keller Williams Realty, said activity has picked up since Thanksgiving.

“The high point was in October with the interest rate over 8%, there seemed to be a stall in September-October. Those have come down considerably and the market has woken up. We’re seeing lots of new construction, builds under construction. My team of five signed 11 listings in the last two weeks,” she said in early March.

She said creative solutions are being offered to counter the higher interest rates and help buyers get into new homes.

“A lot of builders are offering concessions for paid upgrades, maybe paying closing costs. That has been something that was happening before the rates dropped. They’ve kept our market healthy. Those extra efforts on the builder’s part has really been something that’s kept people moving,” Merchant said. “We’re seeing lots of downsizing and new listings keep hitting the market.”

While potential buyers may have been hesitant to move forward with higher interest rates, it’s now a healthy time for sellers as rates are starting to decrease, experts say.

“One of the biggest drivers keeping business flowing is the changes the builders were able to make, teaming with lenders to offer interest rate buydowns and other incentives,” Merchant said. “Now the interest rate is a full percent lower, giving people confidence to start their plans. I’ve had 5-6 first-time homebuyers recently, buying new construction because of incentives back, and first-time homebuyer grants.”

In Minnesota, the West Central region saw a 41.7% increase in listings in January 2024 over January 2023. The median sales price was up 17.3% year over year and the number of days on the market until sale was up 4.7%, according to Minnesota Realtors, a nonprofit industry organization.

Statewide, new listing gains may indicate one or both things: sellers are more optimistic about getting a stronger offer and/or feeling better about their payments on the next home, given rates are near an eight-month low.

Market activity always varies across areas, price points and property types. The Detroit Lakes, Alexandria and Grand Rapids regions saw the largest gains in listing activity while pending sales rose the most in the St. Cloud, Willmar and Bemidji regions, the organization’s January housing report stated. Homes took the longest to sell in the Hibbing/Virginia, Mankato and Bemidji regions. The most balanced markets were Detroit Lakes and Bemidji, while the most undersupplied markets were St. Cloud, the Twin Cities, and Rochester.

March through October is the prime leasing season for apartments, and those who aren’t ready for homeownership have a number of options to choose from. McKenzy Braaten, chief communications officer for EPIC Companies, based in West Fargo, said her company has been busy with new mixed-use building openings, such as Spirit at The Beacon in Grand Forks, which opened at the beginning of March.

“We’re about 70% full,” she said. The Beacon district, situated near downtown, consists of three seven-story buildings featuring commercial space, apartments and condos. Spirit is a mix of condos and apartments.

She said there’s plentiful inventory now but prices are higher as is demand, and there aren’t as many special incentives for renters as there were just a couple of years ago.

Bill Rothman, president of the Building Industry Association of the Red River Valley (BIA-RRV), formerly known as the Home Builders Association of Fargo-Moorhead, said growth in the region requires a strong building industry and affordable housing. A study released by the Fargo-Moorhead Metropolitan Council of Governments in June 2023 projected that 16,000 more housing units will be needed in the next 10 years, and the biggest need is for “missing middle” housing, like townhomes and duplexes.

He said many factors go into determining where the housing market is today, and the first is the cost of construction – materials are still high in some areas, while others, such as lumber, are coming down significantly although Canadian tariffs can limit supply. Steel prices have come down the last couple of years but are on the rise again, which is a concern for the industry.

“We have a really strong labor market, especially with the F-M Diversion Project, but we’re competing with those workers,” he said.

At a national home builders convention Rothman recently attended, it was shared that for every new home built in the country, approximately $94,000 of the cost to build is due to additional code requirements at all levels – local, state and federal mandates.

“That really drives the affordability issue. For every thousand dollars in increase on a house, that prices 103 households out of the market,” he said. “In our region, the average price of single-family housing is $442,000. Every time there’s some kind of code change, that costs us – the consumers – more.

“Things that help in this market are property exemptions for two years, on the in-town apartments you have the five-year Renaissance Zone benefits and sometimes pilots and tax policies,” Rothman continued. “Sometimes people get really bent out of shape about them but they’re not only good for the consumer but they’re good for the cities.”

Developers may choose to build primarily on abandoned parking lots that don’t drive much tax value, he said. A tax incentive helps a project pencil out, and income is built up to service the debt, and the result is fully taxed properties after five years.

“It really adds to the tax base for the city and helps keep other people’s property taxes down,” he said. “That’s a really good public policy that benefits everybody in the community.

“We’re (BIA-RRV) very supportive of smart regulations that improve the experience for the consumer, but it is a lot of unnecessary things that create real problems that really don't add value or provide additional safety to the product. We’re not anti-regulation, we’re for smart regulation, smart tax policy,” Rothman said.