Interest rates below 4%
Mortgage interest rates are low, nearly a full point under where they were this time last year, and they’re projected to stay that way throughout 2020 and into 2021. Last week, the interest rate for VA and FHA loans was around 3.25% and the rate for conventional loans was around 3.75%. (I say “around” because lenders are reluctant to give exact numbers for public consumption, because the individual rate is influenced by other factors, such as credit score.) Low interest rates help keep consumer/home buyer confidence high and create demand. They also mean buyers can buy “more house” for the same payment. And that’s a good thing, because inventory is low.
Low inventory
Like the rest of the country, we’ve been struggling with low inventory in Central Kentucky, especially at the “lower” end of the price range (about $250,000 and under in Fayette and Scott counties). A key measure is “months of inventory,” a formula predicting how long it would take to sell the existing inventory if no new listings were added. In a balanced market, inventory should be at 6 months. Higher inventory creates a buyers’ market, while lower inventory creates a sellers’ market. According to LBAR, our inventory in December was 3.07 months, well below the 6-month number. Low inventory means it can be harder for buyers to find a home despite the low interest rates and can lead to bidding wars.
Bidding wars
We didn’t see as many bidding wars in 2019, but now that interest rates are under 4% again, we can expect to see more of them. Bidding wars are exciting and can net the seller top dollar. But they can also inflate prices, creating a situation where the property doesn’t appraise for the sales price. And the higher prices can price buyers out of the market.
Moving Outside of Fayette County
A lot of buyers are simply priced out of the housing market, particularly in Lexington-Fayette County. Or with an average price for a 4-bedroom home at $412,442, they can’t get the size of home they need at a price they can afford. This problem is exacerbated by the limited space available for new construction. Increasingly, those buyers are looking to surrounding counties and many are looking at Scott County, where the average cost for a 4-bedroom home is $319,095 and building is booming at all price points.