The residential real estate market in the Triangle area faced several issues in the third-quarter but demonstrated growth overall, allowing analysts to remain optimistic about the future of the market.

While the Triangle did not suffer a direct hit from Hurricane Florence, the storm had a negative impact on activity. In addition to the storm, mortgage interest rates rose, likely tightening the existing housing market even further and pushing away buyers looking for entry-level homes in regards to new home sales.

Metrics during the quarter were mostly negative, though there were some positive increases such as those in overall and average sales prices compared to last year’s third quarter.

Hurricane Florence hindered September sales.

“Our third quarter metrics were influenced by Hurricane Florence from a showing standpoint, a pending sales standpoint and a closing sales standpoint,” saoid Stacey Anfindsen, who publishes the Triangle Area Residential Realty Reports. “If you look at the activity between September and August, each of those metrics were down between 10 and 25 percent.”

Damage from the storm was limited in the Triangle, but the stagnated business that lasted over a week is was what really hit markets hard.

“Because of pre-hurricane work to secure properties on the construction side, builders were not working,” said Amanda Hoyle, regional director at Metrostudy’s Raleigh Office. “There was also time that people were stuck inside their houses waiting out the storm, so they weren’t shopping for homes, and people planning to come and look for homes postponed.”

In addition, when a hurricane is looming, insurance companies that bond mortgages will stop doing such until the damage from the storm is assessed, in order to minimize additional risk. If these companies stopped bonding, buyers can’t get insurance and therefore can’t close on their homes. This may likely have delayed closings, hurting September sales further.

While Hoyle says July and August sales looked strong in the Triangle year-over-year, September new home contracts were down 9 percent from last year.

“I pinpoint this specifically to the hurricane and the lack of traffic it created,” she said. “But what I’ve been hearing from builder’s clients is that traffic has picked up in October, and we will be able to make some of that back. November is a strong month too. There’s going to probably be a push of additional incentives to make up revenues lost, because these companies still have goals and numbers they need to meet.”

Anfindsen agrees that taking into consideration October and November trends is significant in understanding the effects of Hurricane Florence.

“Storms are different with housing than they are with bread,” he said. “Everyone goes and buys two of three loaves bread when a storm is coming, and then you don’t buy another loaf—that consumption is taken out of future consumption. But, with housing it’s more delayed, so we weren’t looking at houses in the two weeks of September. Whatever activity going on, that was going to happen in September, is going to go on in October or November instead.”

As new home sales rise, prices follow

New home sales in the Triangle possess about 20 percent of the market share for home sales, said Hoyle. New home sales declined during the recession but, as evidenced by third-quarter results, are coming back.

Metrostudy gauges the builder market in the Triangle by looking at with annual starts, evidence that construction is under way, which equates to about 12,600 units a year. Closings, evidence that someone has moved into that house, is just under 12,000 a year. This puts the Triangle at a similar level of construction that it had around before the recession.

Base prices for new homes in the Triangle have also gone up 5 percent to 6 percent in the last year. Looking at deed records, Hoyle says, across the Triangle metropolitan statistical areas, the new average sale price is up 2.4 percent year-over-year.

This increase in pricing may prevent entry-level buyers, especially those seeking affordable housing, from buying a home in the near future.

“It can limit them to the areas of the community that they can look,” Hoyle said. “They may start only looking at town homes instead of detached single-family homes. Other options are renting instead of buying a home, or looking farther away from Triangle.”

Hoyle says Johnston County is popular in this area for affordable housing for individuals who wish to commute rather than pay the higher prices demanded in the Triangle.

“What usually happens is when home prices go up, people drive to where they can afford. That’s the phenomena we are seeing now. There are a few options: delay until later, buy a house with smaller square footage or drive to where they can afford it.”

Existing home sales see little change

Existing home sales remained mostly stagnant over the past year as the inventory continues to dwindle.

As interest rates rise, this continues to impact inventory.

The Federal Reserve Board increased its benchmark interest a quarter of a point on Sept. 26. In addition, the Fed released the minutes of its September meeting Oct. 17, indicating that the Fed will likely continue with rate hikes. With rising interest rates, buyers may be less likely to want to take out a mortgage.

“Mostly, what is happening is that when the interest rates were really low just a few years ago, a lot of people refinanced their homes,” Hoyle said. “So, a lot of those people who refinanced at 3.5 percent are now deciding instead of upgrading and moving into larger homes, they want to remodel their homes and stay where they are at.

“So, they aren’t putting their houses on the market, and those that do want to move are almost too afraid to because there are so few options when they go out looking at their particular price point.”

As a result, inventory is low. Hoyle says equilibrium is usually around a six months’ supply, but for the past three to four years it has hovered around a 2 1/2 months’ supply.

The existing market is extremely tight, but has started to loosen up a little as demonstrated by fewer bidding wars in the Triangle.

“This is because people are watching what’s happening with mortgage rates. Not so long ago it was at about 3.5 or 4 percent, and it’s approaching 5 percent,” Hoyle said. “We have not seen that in many years, perhaps since 2011. That’s going to affect people’s confidence in what they think they can afford and what they want to buy in regards to existing homes, but also with new homes.”

In addition to interest rates, Hoyle says prices have been going up as well. In the Triangle MSA, the average sale price for existing homes is up 5.1 percent year-over-year according to deed records.

Mortgage rates are rising

While the economic demographics of the majority of Triangle buyers are above those seen nationally, the market is not immune to mortgage rate increases. Current 30-year mortgage rates range between 4.75 percent and 5 percent, this is the first time they have been at this level roughly since 2010.

Rising mortgages affect current home buyers. Applying a 4.75 percent mortgage rate to the third quarter average sales price of $319,500 produces a principal and interest payment of $1,500 with 10 percent down.

This also has an influence on existing homeowners who purchased during the interest rate bottom in 2012. Comparing the average PI in 2012 to the current average indicates a difference of $654, or $7,848 annually.

However, the full effects of interest rates on mortgages are still unknown.

“This may take people out of the market who were thinking about buying homes, or they may start delaying those plans,” Hoyle said. “I’m hearing talk that some millennials are hesitating on going forward with plans to buy a home, because they think right now home prices are pretty much near peak value. But, as far as what they can afford whether they want to buy now or want to continue to wait and see what happens with the mortgage rates, is the issue buyers are grappling with.”

Anfindsen echoed this sentiment of uncertainty in regards to mortgage rates.

“It will show up in the fourth quarter if it’s an issue,” he said. “As interest rates increase, the cost of your monthly payment goes up. As you go up in price, you can typically absorb it. But, it doesn’t really get absorbed if you’re an entry-level buyer trying to buy something around $300,000, and your payment goes up $200 or $300 a month.”

“It doesn’t leave a lot of cushion when something goes wrong. Buying a house becomes riskier—it’s a mental roadblock and it’s a financial road block. Fortunately for our market, it has not been as big of an issue as of now, but we don’t know where these rates are going.”

Housing in Durham

With a growing economy and relative affordable compared to Chapel Hill and Raleigh, Durham has attracted investment proving it to be a promising housing market.

The Herald Sun reported that 2017 was a profitable year to be a house flipper in the Bull City.

While the number of flips in the Triangle lagged behind the national average, Durham gave flippers the highest return on investment of any city in the Triangle area 2017, according to California-based real estate data company ATTOM Data Solutions.

According to the report, four out of five of the Triangle’s most profitable ZIP codes for house flipping, in terms of gross return on investment, were in Durham. In comparison, no ZIP code in Raleigh made the top 10.

The returns are likely fueled by Durham’s competitive housing market, in which multiple buyers are bidding on the majority of properties.

The vigor of that level of flipping, however, may lead to serious implications for some neighborhoods. One such consequence, gentrification, has already begun to affect the area.

A summer 2018 study from the North Carolina Poverty Research Fund revealed that historically redlined Durham neighborhoods have seen intense increases of home prices combined with the influx of new, whiter residents. The Southside, East Durham and Old North Durham have seen some of the most acute price increases in recent years, the study reveals.

For example, in Old North Durham, median sale price in March 2018 was $405,000, up 938 percent from six years ago.

“The language used to describe homes for sale in these neighborhoods is loaded with gentrification buzzwords,” the study said. “A land grab of sorts is underway: a house may be a ‘great candidate for updates and rehab,’ but if you don’t like it, it can be a ‘tear-down to make room for new construction.'”

Looking forward

Both Anfindsen and Hoyle remain positive about the future of the residential markets.

“I don’t think anyone who is not optimistic,” Anfindsen said. “That’s the great part of where we live— it’s so rare to get any economic bad news. I haven’t read a single person who is negative about our local economy, therefore its tough not to be optimistic about what’s going to happen.”

Hoyle acknowledges, however, that an economic slowdown is likely to occur. She believes the market will continue to grow, but at a slower pace than its current rate.

“Most economists that I’m reading and talking to say economic slowdown is going to happen in 2020 going into 2021,” she said. “I’m still very bullish about the Triangle in regards to real estate, just that level of caution that you can’t expect 15 percent growth every year. It has to slow down at some point. If businesses start to slow down their investments in the area then it’s going to trickle down into their workforce and the housing market too.”‘