KCHBA Hosts Full House for Navigating Interest Rates Panel

On March 15, the KCHBA Associates Council hosted a sold out panel presentation on navigating interest rates at the KCHBA. Moderated by Misty Hanson (Stewart Title) the speakers included: Jon Otten (Capitol Federal), Todd Geiman (Gateway Mortgage), Bruce Stout (Rodrock Realty), Matt Ernst (Ernst Brothers Home Construction), Marty Albertson (Stewart Title) and Will Ruder (KCHBA).

“Interest rates have risen dramatically over the last 15 months,” Otten stated. “Roughly every percent that [mortgage] rates increase, it decreases purchasing power by about 10 percent.” One response to this market is adjustable-rate mortgages. “We hadn’t seen much of that when rates were in the 2s and 3s [percent],” said Otten. He highlights that rates today are as high as they have been in the last 15 years, so proceed with caution on locking in a fixed 30-year mortgage and discuss other possible options that might benefit you more in the long term.

Geiman believes builders, lendors and realtors would all benefit to sit down together more often and try to problem solve. “It’s all hands-on deck right now,” said Geiman. Geiman pointed out the U.S. needs 2-4 million more houses, but with rising interest rates current homeowners and older generations have even more incentive to stay put in their current homes. Geiman acknowledges the burden this puts on the homebuilders. He believes this “stay put” mentality will likely see an increase in business for the home improvement industry. As far as the future, Geiman wouldn’t be surprised if mortgage rates settle in between 4.5 and 6 percent for the next decade.

While acknowledging the unique difficulties of the past few years, Stout pointed to the importance of finding ways to reduce the cost of building overall. “The quality of [building in the Kansas City metro] today, across the board, is probably the highest I’ve ever seen in my 27 years [in the industry],” stated Stout. “But development costs are rising just as fast as the construction side… typical ratios we saw 10 or 15 years ago are gone.”

According to the KCHBA permit data report, January permits are down about 66 percent in 2023 compared to 2022. “We’re not going to have anything to sell in the winter of 2024 if we don’t reload today,” said Stout. Stout is an advocate for looking at the bigger picture and making sure companies are preparing for a year or two down the line. He has seen the buyers that are still house hunting are accepting the new interest rates.

“We’re not having that conversation; everybody knows the rates are in the 6 [percent]s,” said Stout. “The issue is how many people have we knocked out of the buying pool because of those interest rates and the inability to build less expensive and get product in the pipeline that is more affordable.”

Albertson started his discussion off with a warning of the rise in phishing scams and fraud within the industry. “These are not unsophisticated attempts; these [fraudsters] are IT educated and much better at technology than we are,” said Albertson. Obvious grammar mistakes and other easy to identify markers of a scam are a thing of the past. “Nowadays, I can look at a fraudulent email, compare it to a legitimate employee email, and it will take me 45 minutes to find the difference,” stated Albertson. Words of advice include using two factor identification or directly deal with any transactions within a secure bank portal. Vacant land fraud is also becoming more common. “If you don’t have the ability to meet that seller face to face, don’t trust them,” warned Albertson. When it comes to watching the news for housing information, Albertson suggests exercising caution. He also advocates changing the tone of the conversation for any mortgage rate under six percent.

“This period of time with artificially low rates was not normal; in all likelihood none of us will ever see that again,” said Albertson. “Interest rates in the next 10 years, if they’re between 4.5 and 6, that’s a great time to buy a house. But you have to voice that narrative.”

Ernst is a builder in the Northland. He mostly builds spec homes using the same floorplans for a few years at a time. When it comes to interest rates, he remains cautiously optimistic for the future. After artificially low rates in 2021 and 2022, Ernst is now seeing interest rates similar to 2019. “I picked up a construction loan the other day at about 6.5 percent; back in 2019 we were paying 5.75,” stated Ernst. “So we’re not prohibited as far as construction rates go.” The thing that stood out the most to Ernst was material cost. “One home’s lumber package was $40,000 and then jumped to $80,000,” said Ernst. He does believe, when it comes to production, “we are going to lose an entire cycle.” Builders were stretched to capacity and we’ll see that impact down the road. “We do need to get some houses in, but there is some product [right now] that isn’t being moved quickly.”

Ernst agrees with the narrative of many current homeowners staying put along with the expectation of needing a low three percent interest rate scaring some buyers away. But above all else, Ernst is anticipating the new code cycle in Kansas City, Mo. to be the biggest hurdle for homebuilders in the near future.

“One of the things the KCHBA is committed to is not being the source of any pessimism out in the market. We’re going to tell an accurate story, but not cause a panic,” stated Ruder. With the current timeline of building, or even buying a home, right now is still a good time to buy. “The sooner you begin that process, where a lot of your competition for a limited amount of product is waiting on the sidelines, that’s an opportunity for buyers to build a relationship with their real estate professional, builder and financial institution… if you start that process when you start to feel great about [the market], you’re already behind.”

This problem is exacerbated by the historically low inventory of resale product available. “New starts will always lag behind sales; it’s a response by the homebuilding community for anticipated demand,” said Ruder. “It now takes a full calendar year to build a house.”

The burden of not only providing enough housing, but financially obtainable housing, currently weighs heavily on the new home construction industry. “We’ve got significant headwinds from a regulatory standpoint that are going to put us even further behind,” stated Ruder. Interest rates and material costs aside, the demands being presented from federal, state and local regulators will continue to greatly impact the cost of housing.