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Before we get to our main headline topic, the big news impacting the real estate market over the past several weeks revolved around the Federal Reserve's most recent meeting and its decision on July 26 to raise the Federal Funds Rate by a quarter percentage point.
This was followed by the other big breaking news story this week, which was the decision by the credit rating agency Fitch to lower the credit rating on U.S. long-term debt from a AAA rating to a AA+ rating. Fitch cited out-of-control government spending, a high and growing government debt burden and an erosion of governance as the primary reasons for the downgrade. At the same time, Fitch removed U.S. government debt from its negative credit watch list, changing its rating to "stable."
We would expect that what should be taken as a warning to the politicians in Washington over their fiscal policies and the way they are running our government, will likely be long forgotten by the time their next opportunity to tack on more wasteful pork barrel spending presents itself. With mortgage rates hovering a bit above 7% before this downgrade, the news is still being digested by the markets.
Turning our attention back to the Fed and the topic of interest rates, after pausing at its June meeting, the Jerome Powell-led Federal Reserve raised the rate on the key ultra-short-term Federal Funds Rate at the Federal Open Market Committee meeting July 26, as expected. This was the 11th rate hike since March 2022, bringing the Fed Funds Rate to a 22-year high, and putting it in a current range of 5.25 to 5.5%. This move from a near 0% Fed Funds Rate to 5.5% has been the fastest and steepest interest rate move by the Fed in the past 40 years, and it has come with some growing economic repercussions.
For now, the Fed seems committed to maintaining a "higher for longer" stance with interest rates as inflation has moderated, while keeping the potential for another rate hike on the table for its September meeting. So far it has managed to avoid the long-awaited predictions of a severe recession, with a growing optimism that it has managed to engineer an elusive "soft landing" with our economy.
One of the intended repercussions of the Fed's war on inflation has been through sharply higher mortgage interest rates in the attempt to bring the housing market down to stall speed. This has created several issues in the real estate market nationally, as well as locally, in that it has eliminated a fairly large segment of buyers from the market because they can no longer qualify for a loan due to the higher financing costs. These higher mortgage rates are also keeping some potential sellers from putting their homes on the market because they are locked in at record low mortgage rates on their existing homes and they do not want to trade their current 2 to 3% mortgage rates for a 7%-plus rate on a new home. This has contributed to existing home inventories remaining tight in many parts of the country
As we have been noting for the past year, locally we started to see a dramatic change in our market in April and May of last year as the Fed started to change direction and move towards higher interest rates. This showed up in our market statistics as a significant decline in closed home sales last July, along with a drop in median sales prices and a sharp rise in the number of homes being listed for sale. Over the past several weeks we have been pointing out the slowdown in the number of closed sales in the Cape Coral luxury home and condo markets in the first half this year compared to last year. Although the price points in our luxury market do not come even remotely close to the various ultra-high-end luxury real estate markets from around the country, we have experienced a similar trend towards lower sales volumes as experienced on a national level.
This decline in luxury market sales was pointed out in an article written by Katherine Clarke and E.B. Solomont in the July 28, 2023, edition of the Wall Street Journal, as they noted that luxury sellers from all across the country are struggling to get their homes sold. They indicated that, "the high-end real estate market faces a perfect storm of rising interest rates, recession fears and population shifts in the wake of the pandemic." Various Realtors pointed out in the article that quality of life issues in big cities, including rising crime rates, combined with people and businesses fleeing from high taxes and moving to low tax states have put additional downward pressure on sales. Generally speaking, sellers who have adjusted to the shifting market conditions by lowering their prices are able to find buyers, while sellers who refuse to accept the current market realities have their homes stagnate on the market.
One of the featured homesellers in the article was Joan Dangerfield, wife of the late comedian Rodney Dangerfield, who has had her Los Angeles home on the market for $17.8 million since February of this year. She was quoted as saying, "I figured it would sell in a week, but it didn't quite work out that way."
She added that, "It was a shock for me to just watch it sit there on the market," although we are guessing it came as no surprise to Rodney in a "No respect, I tell you" one liner kind of way! This is the same thing some local sellers have been feeling over the past year as our local market shifted from boom to normal.
One of the other factors cited in the article that is impacting luxury home sales in Los Angeles, including the Dangerfield home, was the imposition of the new local "Mansion Tax" that went into effect in L.A. on April 1 of this year. As is often the case with changes to the tax law, when people did the math they raced to close their sales by March 31 to avoid having to pay the additional tax. Realtors in L.A. are saying luxury home sales there have largely been reduced to a trickle since this tax went into effect.
Here is a snapshot from the WSJ article about the drop-off in luxury sales from around the country in the three-month period ending on June 30, 2023, compared with the year earlier period. Sales volumes were down about 40% in Miami; down over 39% in Nassau County on New York's Long Island; down almost 36% in New York; down 36% in Los Angeles; and off by some 3 % in Chicago.
As of Tuesday, Aug. 1, the active listings and pending sales through the MLS for single-family homes in Cape Coral remained range bound with 1,768 homes listed for sale on the market, along with 786 pending home sales in the pipeline waiting to be finalized. The median list price came in at $529,450 and the median pending sales price was $395,597. There were 216 luxury homes listed for sale in the Cape (defined as having a list price of $1 million and above), and 28 luxury homes under contract with buyers as pending sales. One year ago on Aug. 2, 2022, there were 1,387 active listings in the Cape with a median list price of $530,000 and there were 679 pending sales. At that time there were 188 luxury homes listed for sale and 26 pending sales in our luxury home market.
The sales data for this article was obtained from the Florida Realtors Multiple Listing Service Matrix for Lee County, Fla., as of Aug. 1, 2023, unless otherwise noted. It was compiled by Bob and Geri Quinn and it includes information specifically for Cape Coral single-family homes, and does not include condominiums, short sales or foreclosures. The data and statistics are believed to be reliable, however, they could be updated and revised periodically, and are subject to change without notice. The Quinns are a husband and wife real estate team with the RE/MAX Realty Team office in Cape Coral. They have lived in Cape Coral for over 43 years. Geri has been a full-time Realtor since 2005, and Bob joined with Geri as a full-time Realtor in 2014. Their real estate practice is mainly focused on Cape Coral residential property and vacant lots.