Interest rate hikes are making Kansas City's real estate market 'savagely unhealthy'

Andy and Stephanie Scoates have moved every few years since they came to the U.S. more than two decades ago — most recently from Oklahoma to Kansas City. They’ve spent more than a month searching for a house to buy in the metro.

At an open house this weekend in the Lee’s Summit area, the couple said the money they got from selling their last house isn’t stretching as far as they had hoped.

“When we bought a house in Oklahoma, we were the only ones that looked at it, but we liked it straight away,” Andy Scoates said. “We put an offer in, which was below the asking price, and it was accepted. That was only two and a half years ago. It’s crazy what we could afford two years ago, and what we can afford now, are most definitely different.”

The Federal Reserve has raised interest rates again in an attempt to combat inflation — an increase of 0.75% in June, and another 0.75% just this past week.

The higher rates appear to be slowing down Kansas City’s hot housing market: Sales of existing homes in the metro have decreased by 10.2% since May, while new homes have dropped 5.3%.

Pending sales for new homes, meanwhile, have dropped by a whopping 30.5% in the last month.

Despite the slowdown, buying a home hasn’t gotten much easier.

Andy Scoates says the pair has seen at least 20 Kansas City houses in their search thus far — and they’ve looked at hundreds more online. The Scoates put an offer in on two homes but lost out because they were outbid.

At other houses they were interested in, the house was sold before they could even discuss making an offer.

“It used to be that when you put an offer on a house, you could offer less than the asking price, and you were told not to offer the asking price,” Stephanie Scoates said. “My friend in California said that you had to offer more than the asking price – it had to be like at least $10,000 over. That was in California and now it’s become normal country-wide. We thought that was crazy back then and now it’s just crazy everywhere.”

Housing demand has been high since the start of the COVID pandemic, according to the Federal Home Loan Mortgage Corporation, because of record low mortgage rates and the expansion of remote work.

Michael Pierce, president of the Kansas City Regional Association of Realtors (KCRAR) and founder of SEEK Real Estate, said even though the market is slowing, sales are still competitive.

“Our average days on the market right now is 16 days, which is still very low, and there are a significant number of houses that go on the market and will go under contract in just a couple days,” Pierce said. “Our average is still 103% average sales price versus list price, but we’re just not seeing the type of frenzy that we’ve seen for so long, and that has come fairly quickly.”

According to KCRAR, the average price of a new home in Kansas City has increased about 18% since June, to a peak of almost $517,000. Prices on existing homes have gone up 15%, to about $300,000.

Mortgage rates have doubled

Logan Mohtashami, lead analyst for HousingWire, said the current housing market is “savagely unhealthy.” He believes that its issues started in 2020, but not entirely because of COVID-19.

According to Mohtashami, the combination of millennials entering the market and people “exporting inflation” — moving from more expensive areas of the country to cheaper ones, like Kansas City, and driving prices up — is responsible for rising home prices.

And in Kansas City, there just isn’t enough housing stock to go around.

“Higher [mortgage] rates do create a cool down in pricing, and we should see that over the second half of the year on a year-over-year basis,” Motashami said.

According to FreddieMac, the average interest rate for a 30-year fixed-rate mortgage is 5.3%, more than 2% higher than the beginning of 2022, and almost double what it was this time last year.

According to Dr. Jessica Lautz, vice president of demographics and behavioral insights at the National Association of Realtors, those price jumps are “pushing some buyers to the sidelines.”

“I think this is really unfortunate for a lot of people who have tried to enter the housing market over the last two years and may have lost out on a number of contracts in bidding wars and then they’re now priced out of the housing market,” Lautz says.

Lautz says some first-time home buyers are moving in with roommates to combat high down payments and mortgage rates. This strategy is also popular with elderly people who need companionship as well as affordable housing.

However, it’s not an option in some parts of the metro. In April, the Shawnee City Council voted to limit the number of unrelated people who could rent rooms in one house. The co-living ordinance sparked a petition from some residents, who’ve called it “racist” and “classist.”

For prospective home buyers, Lautz says she’s seeing people move back in with their parents or renting for longer in an attempt to save up for a down payment. But rising rents are making even that difficult.

Rents are rising, too

In May, the median rent in Kansas City was more than $1,300 per month, according to Realtor.com. That’s an increase of about 11% from last year.

With both home prices and rents high, more people in Kansas City are being left without any option for affordable housing.

“When your rent is going up at that pace it’s incredibly difficult to think about even purchasing a home, let alone putting gas in your car or buying the groceries that you need for your house,” Lautz says.

Tara Raghuveer, director of KC Tenants, said that inflation and increasing rents are putting tenants in a state of crisis – one that’s not likely to go away.

Whereas other costs, like gas and food, will likely go back down when inflation subsides, rent will continue to rise.

“Landlords tend to charge whatever the market will allow, and it’s not based on the condition or quality of the home,” Raghuveer says. “Unlike other areas where American people are being squeezed by inflation, rent is not something you can simply cut back on. You might have the flexibility in your life to cut back on gas or the amount that you need to drive. You can’t cut back on your need for a home. You can’t get cut back on the amount that you’re paying in rent.”

Raghuveer says that the rate hikes the Federal Reserve uses to calm the housing market only put more pressure on renters.

“It makes home ownership prohibitive to a class of people that are aspiring home buyers,” Raghuveer said.

Little chance for relief soon

Kansas City’s housing market won’t become balanced again without an increase in supply. More homes for sale would mean less competition and more room for price negotiation.

But Pierce says that will take years to achieve.

“You really have to look at how significantly low the inventory in Kansas City is,” Pierce says. “There’s only 4,700 homes on the market, and that is substantially lower than what you would normally expect — and we’re still selling roughly 4,300 homes a month.”

Motashami says the declining number of sales gives the market more time to build up inventory, and he believes that if mortgage rates stay above 5%, “we can get a balanced market by next year.”

Whether or not that happens, Raghuveer says politicians still need to step in with solutions for affordable housing.

“One thing that’s important in the context of the inflation crisis is that adding supply to the market is not quick business,” Raghuveer said. “The soonest that impacts the market is in three to five years. That does nothing for tenants who can’t afford their rental right now or can’t afford their rent in August.”

Back at the Lee’s Summit open house, Andy and Stephanie Scoates are anxious to find a house within their price point that works for them. But they’re even more concerned for people entering the market for the first time.

“We’re fortunate, we’ve built up a little nest egg after 22 years of buying houses here in the states,” Andy Scoates said. “But those people that are on the beginning of the ladder, I feel so sorry for them.”

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