First time buyers face steeper climb in NKY market

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BY GRACE TIERNEY | LINK nky REPORTER AND MATT OTT | AP BUSINESS WRITER

Buyers are returning to the market faster than inventory, and realtors are seeing an uphill battle for renters looking to transition to homeownership.

Northern Kentucky native Thomas Hedger is looking to move back to the area after spending the last six years in Florida. When he spoke to LINK nky, Hedger was in the process of purchasing a home.

When he lived in the region, his family resided in Dayton, Fort Thomas and Silver Grove. Naturally, when he moved back, he started to look at homes in those areas, particularly in Fort Thomas.

With bachelor’s and master’s degrees from Northern Kentucky University and now working for a Fortune 500 company, the 34-year-old was planning to buy his first home in the $150,000 to $200,000 range.

He has student loan debt to manage and he said he wanted to live comfortably. Hedger was surprised to see that the homes in his price range weren’t exactly move-in ready.

“The homes I saw I wouldn’t house my worst enemy in,” he said. “Maybe that's a funny way of saying that, but there were things that were just completely unfinished and would need to be gutted to really be brought up to standard, and they were selling for over $100,000. I found that very strange, very bizarre, and things that were new builds were over $300,000.”

He said he found it most surprising to see how much condos were going for in the area.

“I saw condos in Fort Thomas selling for almost a million dollars. I hit the floor. I mean, that's always been a really rich neighborhood, but a million dollars for a condo? I mean, this is Northern Kentucky, not Chicago,” Hedger said.

While buyers with bigger budgets have less competition, those looking to buy a home at $250,000 and under are facing low inventory, higher interest rates on their mortgages, and more competitive offers on desirable homes in this region.

When Hedger placed an offer on a home, he offered what the sellers were asking for and requested they pay $4,000 in closing costs. Those sellers counter-offered higher than the asking price, and Hedger had to walk away.

Local agent Brad Acree with Better Way Home Group, which sells homes in Cincinnati and Northern Kentucky, sees this trend firsthand.

“It is very common to have 10-plus offers and I have even heard of homes with 20plus offers,” Acree said. “I have had clients who have offered $30,000 over list price and were still beat out by other buyers. Some buyers are back to waiving their right to an inspection, which I would never advise.”

He added that the competition in the market and the increase in home values caused him to rethink his budget.

The nation’s worst housing slump in nearly a decade stoked hope among prospective buyers that homes could be scooped up more easily. But while prices appear to have peaked last summer, they still ended 2022 higher than they were at the end of 2021. And the median U.S. home price has increased 42% since 2019.

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Last year, the Federal Reserve pushed mortgage rates to their highest level in two decades, according to data reported by the Associated Press. On March 22, the Federal Reserve raised rates by another 0.25%.

AP coverage shows the average longterm rate on a 30-year mortgage reached a 20-year-high of 7.08% in the fall. Rates eased in December and January, but have been climbing since early February. The average rate hit 6.73% in March, the highest level since early November. A year ago, it averaged 3.85%.

That rate translates into a roughly 49% increase in the monthly payment on a median-priced home than a year ago, said George Ratiu, senior economist at Realtor.com.

“For real estate markets, the rise in rates means higher mortgage payments, deepening the affordability challenge just as we move into the crucial spring homebuying season," he said.

For prospective buyers holding out for a meaningful dip in mortgage rates, they may be in for a long wait. Zillow recently polled 100 economists and real estate experts on their outlook for what the average rate on a 30-year mortgage will be by the end of this year and the median forecast was 6%.

Stronger-than-expected reports on the economy this year have fueled expectations that the Federal Reserve may have to keep pushing up its key borrowing rate to tame inflation, deepening the affordability challenge for would-be buyers.

Realtor Katie Campbell of Sibcy Cline told

LINK nky that while this time of year is tough for buyers, sellers are taking advantage.

“Listings are starting to pick up for the spring,” Campbell said. “Our sellers can take advantage of the market to sell at a higher price point and use their equity to power a move.”

Acree said many homeowners are staying put, though, which is also driving the low-inventory issue.

“Inventory is down because most homeowners have mortgages with interest rates near 3%,” Acree said. “That same homeowner would pay thousands more in in- terest to get the same house if they were buying today.”

At the same time, buyer demand in the Ohio and Kentucky region remains high because a 6.5% to 7% interest rate is still better than paying rent in the region’s metro neighborhoods.

The high interest rates make the market unattractive for homeowners who have the equity to pay 20% down on a new home, and an unfavorable one for first time buyers, like Hedger, who often have to opt for a lower down payment.

While it’s not the most welcoming market, current interest rates are still below the av- erage over the last 50 years, 7.81% and just above the average over the last 30 years, 5.97%. Local realtors know new homebuyers are willing to pay those interest rates.

Acree said the problem is how quickly interest rates rose after an extended period of low rates used to bolster the economy during the pandemic. While those low rates were a “necessary response” to inflation concerns, in his opinion, the hike in interest rates last year “was a miscalculation.”

“Interest rates were held down to heat up the housing market while other parts of the economy struggled during the pandemic. The miscalculation is the pandemic drove housing demand rather than tamping it down,” he said. “I even moved in the summer of 2020. My wife and I, like many others, decided we wanted a home with more natural light and a better space for us to work from home. I believe we would have had a great housing market during the pandemic with average interest rates.”

Campbell said buyers bidding over asking price kick-started the intense market during the pandemic as well.

“The low rates we had during the pandemic created more demand than we had inventory, which was a very imbalanced market,” Campbell said. “The rise in rates has begun to create more balance in the market, more of what we are used to seeing in the past when the market doesn’t unfairly swing too far toward either buyers or sellers. This type of market gives buyers the purchasing power they need while motivating sellers to pull out their equity to buy a new home.”

Another factor that may keep people out of the housing market is the fact that the amount of money a typical homebuyer needs to earn in order to afford a house continues to climb.

In the fourth quarter of last year, one had to make at least $80,142 a year to buy a home at the national median price of $325,000, according to an analysis by Attom, a real estate information company. That’s a nearly 36% increase from the same quarter in 2021.

The analysis, which was based on data from 581 counties, defines an affordable home purchase as a transaction that includes a 20% down payment and monthly costs for the mortgage payment, property taxes and insurance that don’t exceed 28% of the buyer’s annual income.

One market shift that could help make homes more affordable is a significant increase in homes for sale.

Nationally, there are more available now than a year ago, and that’s likely to increase in coming weeks as traditionally more homes hit the market in the spring months, but the question looms of whether that trend will impact the Northern Kentucky region.

The number of homes for sale rose for the first time in five months in January to 980,000, up 15.3% from a year earlier, according to the National Association of Realtors. That amounts to a 2.9-month supply at the current sales pace — better than in January of last year.

But it's still far from the 5- to 6-month supply that reflects a more balanced market between buyers and sellers. And the prospects for a bigger spike in supply are slim, given that new construction hasn’t kept up pace with demand after years of underbuilding following the housing crash in 2008.

At the same time, most homeowners with a mortgage have locked in ultra-low rates over the years and have less financial incentive to sell.

Acree said lowering interest rates alone won’t resolve the market's current issues –as long as there are more buyers than there are homes, the competition will be stiff.

“Interest rates get the headlines because everyone feels it," Acree said. “Our current situation is that demand exceeds supply. Lowering interest rates would make some homeowners more willing to sell, but it will also bring more buyers to the market.”

Acree added that some of those buyers may include institutional investors, similar to the larger corporations who purchased real property during the pandemic during the dip in interest rates, creating the “land grab” trend.

Homes are also taking longer to sell. On average, homes sold in 33 days of hitting the market in January, up from 19 days a year earlier, according to the National Association of Realtors. That trend is a mixed-bag at the local level. While some homes remain on the market for more than a month, others are being snatched up quickly.

“I started looking earlier this month (in March) and things progressed much faster and quicker than I normally would have liked, because it just seemed like everything was flying off the shelves,” Hedger said.

The risk of a long wait to sell is pushing some sellers to lower prices. In January, about 190,000 homes on the market had their price reduced, a nearly threefold increase from a year earlier, according to Realtor.com.

Many buyers are also increasingly opting for a mortgage rate buydown, which lowers the rate on their home loan for a few years or for the life of the loan and thus reduces the homebuyer’s overall borrowing costs. In exchange, buyers pay fees as part of their closing costs to cover the rate buydown.

Nationwide, some sellers are even offering to cover those closing costs for a buyer to get the deal done. Those trends aren’t carrying over to the local level, though. Instead, realtors are more often seeing homes go to a bidding war between buyers who have equity as opposed to the first-timers looking to scrap their rent bills.

When Hedger knew he was returning to Northern Kentucky, he weighed buying versus renting. With 11% down and a 5.6% interest rate for his mortgage, his monthly costs would be equal to renting an apartment in the area – about $1,300 – but he didn’t want to “throw away” money on rent when he could be building equity.

Like many first time home buyers, Hedger knew he could afford the monthly payment but had to consider the upfront cost of purchasing a home.

“For homes priced below $250,000, there is still a lot of buyer demand and not enough inventory,” Campbell said. “In the higher price points, it’s more balanced now than during the pandemic because there is more inventory.”

Acree said part of the solution comes with increasing home inventory and variety –so not just an influx of new construction homes in subdivisions but different levels of housing for different levels of need and income.

“If we want to solve the housing crisis, we are going to need laws that allow for hous- ing to be built,” Acree said. “This should include starter homes and the ‘missing middle’ like duplexes, triplexes, quadplexes and townhomes.”

Brent Cooper, president of the Northern Kentucky Chamber of Commerce, said whether it’s referred to as affordable housing or homes for the “missing middle” that Acree described, “we don’t have enough.”

“For us, it’s all about talent, at all levels. Whether that’s young professionals, new families, or more experienced professionals trying to locate to our region, there aren’t enough choices and costs are rising too quickly,” Cooper said.

Cooper said the Chamber is partnering with local groups who “continuously talk about this challenge and possible solutions.”

Cooper added that this isn’t a unique phenomenon to Northern Kentucky. He said economic and workforce leaders all over the country are talking about the same problem.

He said incentives for new construction of “affordable homes,” building affordable housing along public transportation routes, and modifying zoning restrictions to allow for more home options, like multi-family housing, are a few proposed solutions.

“Regardless of the solution, people need to understand, this isn’t just about a future Northern Kentucky. This issue is happening right now,” he said. “If we want to maintain our current quality of life, the issue of affordable housing is something we’re going to have to address, together.”