DeLacey Homes

In this month’s update, I want to address a topic that has been frequently discussed over the last couple of years: affordability.

Home prices have been rising year over year for quite some time. This, combined with rising interest rates, has created an affordability issue for many homebuyers.

Cities have attempted to combat this issue, but the solutions implemented have not been very effective. Many cities have approved more building permits in an attempt to increase inventory. However, as a friend of mine observed, it’s not just a lack of inventory, but a lack of affordable inventory that makes buying a home difficult.

Simply building more homes will not solve the affordability issue if the homes being built are not affordable. Entry-level new construction homes start at $350,000, and that’s only if you are well outside the Twin Cities. In many markets, new homes cannot be purchased for less than $400,000-$500,000.

In my view, to address affordability, we need to build homes that are more like the ones currently affordable. Smaller homes on smaller lots, with or without garages. Unfortunately, building codes in most cities no longer allow for these types of homes to be built. While some cities have heard the argument that changing building codes is necessary to truly solve affordability, most are not interested in doing so.

Home values continue to remain strong as demand remains high in most price points, especially in lower price points.

There’s been a lot of hype around rumored interest rate cuts over the last couple of months.

Late last year, many news outlets were predicting up to 6 rate cuts by the federal reserve in 2024. As inflation continues to come down, many have been optimistic that the federal reserve would start to ease up on rates.The Motley Fool reported on Christmas day of last year that, “Relief is on the way. According to Wall Street experts, the U.S. Federal Reserve is poised to cut interest rates six times in 2024.”

A reduction in interest rates by the Federal Reserve would likely bring down mortgage interest rates. Though not directly tied, mortgage rates tend to move in the same direction as the federal funds rate.

Despite all the optimism, Fed Chairman, Jerome Powell has not given a clear indication on what to expect. He has hinted towards cutting rates but has been emphasizing the want to see more data pointing towards prices being stabilized before initiating rate cuts.

Jobs data early this month showed many more jobs being added to the economy than what was expected in January. Although in many ways this is good news, it’s counter to what the Federal Reserve wants to see before starting to cut rates. Federal Reserve Officials have been lowering rate cut expectations as they continue to remain cautious. However, it seems likely we will see rate cuts but it’s unclear how many will actually happen.