High interest rates, high prices, low inventory for Chattanooga area real estate create quandary for potential homebuyers, sellers

Contributed photography / Marcus and Katy White
Contributed photography / Marcus and Katy White

When Katy and Marcus White discovered they were expecting a new baby in October, Katy and Marcus White decided it was time to buy a new home. But after two months of searching and constantly being outbid by others, they've given up for now.

The couple lives in a home at the foot of Signal Mountain, one that they inherited through family and that Katy describes as a "major fixer-upper." Built in the 1960s, the home had been vacant for a decade until the two of them moved in. Together, they have been undertaking restoration projects, occasionally hiring help but mostly tackling the work themselves.

With Marcus' military service and their status as first-time homebuyers, the Whites were able to qualify for a veteran's loan through USAA bank at a rate of about 5%. While they still found the percentage high, it was much better than rates offered by other lenders which ranged between 6% and 7.5%.

"It was a combination of all the stressors," says Katy. "It's stressful fixing up a house, but with both of us working, having to spend the time looking at the constantly rotating houses, send messages to the realtor about which ones we were interested in, having them set up an appointment, having to visit in the evenings after work, and having to decide immediately because the house would be gone immediately — it was too much to deal with."

"I could have managed maybe two factors, but all three — high interest rates, home prices and being instantly outbid — were extremely stressful. It felt like a full-time job searching, making offers and then having to start over."

For now, the Whites plan to continue residing in their fixer-upper and hope that the housing market will cool down within the next year or two.

"Even if interest rates stay high, I would be willing to try again — if they just weren't being bought so quickly," says Katy. "It's frustrating when people buy these houses just to rent them out. When I'm looking, I'm looking for a place for my child to grow up."

The Whites are not alone in their predicament.

"These are weird times," says Bryan Fryar, mortgage sales manager for the Tennessee Valley Federal Credit Union (TVFCU). Having high interest rates and elevated home prices, yet still a high demand to buy is an unusual combination, he says.

Much of that demand tracks back to COVID, Fryar says. As a result of labor shortages, American workers started earning higher wages, leading to increased demand in the housing market.

Another factor, Fryar explains, is the rise in remote work. With more people working from home, Chattanooga has witnessed an influx of new residents relocating from more expensive markets in California and bigger cities seeking the lower cost of living in Chattanooga — further diminishing the already-low housing inventory and driving prices up.

"Interest rates have a big impact on what people can afford and what they're willing to pay," says Fryar. To qualify for a home loan, a person's debt-to-income ratio can't be over a certain threshold, "and that is pricing some people out of the market, to be honest."

Fryar breaks down the figures to illustrate how small fluctuations in interest rates can add up over the course of a 30-year loan: About a year ago, a $300,000 home had a mortgage rate of approximately 5.5%, resulting in a monthly payment of around $1,700. However, at today's rate of 7.25%, the monthly payment jumps to roughly $2,050, an increase of about $350.

Over the course of 30 years, that's an additional $126,000.

Steven Sharpe, president of the Greater Chattanooga Association of Realtors (GCAR), said the significant rise in interest rates over the past year has made homeowners hesitant to sell their homes and let go of the lower rates.

He offers a glimmer of good news, in that there is an increase in Chattanooga's home inventory. In 2022, Chattanooga had about 1,400 homes available for sale, but GCAR data from June of 2023 shows that has grown to 1,778.

Prior to the pandemic, Chattanooga had an average of 5,000 to 6,000 homes on the market, and during that period of high inventory, homes would typically stay on the market for an average of 120 days. Last year, Sharpe says, homes stayed on the market for around 18 days, whereas now they are staying about 36 days.

So, are interest rates locking people into their current homes?

"It's a combination of things," says Sharpe. "Interest rates do play a big role. ... We're seeing lots of individuals telling agents that they want to list and sell, but they're not willing to do so until they locate the right house to purchase. And the issue is that the person in that house is also waiting for the same thing. So it's a Catch-22."

In some cases, Sharpe says he advises sellers that they may have to move twice — selling their current house, cashing out, living somewhere temporarily until they can find their next residence. Some are willing to accept the arrangement, understanding the need to maximize their home's equity before deciding the next step.

"There are a lot of things having an impact," he says. "The first would be an increase in sales price. Right now, homes are up another 3% from last year. The average sales price in Chattanooga is about $358,000. The other is interest rates. We're seeing numbers in the high sixes and sevens, so a first-time homebuyer or someone wanting to move up is having some difficulty swallowing the bitter pill of leaving interest rates of 3–4%, and then getting into a new mortgage in the sixes and sevens.

He also highlights a factor often overlooked by homeowners satisfied with their home prices. The price they paid for their homes in previous years, such as in 2010, was significantly different from what they would pay today.

  photo  TVFCU Portrait Photography by Dan Henry / Bryan Fryar
 
 

Chattanooga's median home price rose from $171,000 five years ago to nearly $340,000 today. Home values have increased as mortgage rates have nearly doubled over the past couple of years. Therefore, when considering interest rates of 6–7% on a $350,000 house compared to $150,000, the financial impact becomes even more dramatic.

And yet another layer of complexity in all this stems from new residents relocating to Chattanooga from larger, more expensive metropolitan areas with overheated housing markets, he says. This region is gaining many new residents from Atlanta and Nashville, as well as states including California, Idaho, Montana, Michigan, and upstate New York.

"With first-time buyers, they have to make a decision to start building equity and wealth, or stay in the rental market. It's a dangerous situation we're working ourselves into," says Sharpe.

"When new buyers can't afford to buy ... where do buyers come from? Mostly, lately, we are seeing more out-of-town buyers. The fearful side is that we're pricing ourselves out of our local peoples' ability to rent or stay in this area."

The broad trend here, says University of Tennessee at Chattanooga economist Bento Lobo, is that rates are currently higher than they have been in a long time, and are predicted to stay that way for a while. But while they're not the best we've ever seen, they're not the worst either.

"From 2020 through 2022, we witnessed a bidding war," says Lobo, the head of finance and economics in the Gary W. Rollins College of Business at UTC. "Buyers were competing over a smaller supply, which drove prices up.

"But as interest rates have gone up, two things have happened: the supply side has been affected because homeowners are sitting on lower rates and are apprehensive to move; but also, new buyers are holding off because higher rates mean higher monthly payments."

And while the current rate that's hovering at 6% or 7% seems high, historically speaking, we're somewhere in the middle of all-time highs and lows, he says. During the 1980s, 30-year mortgages were in excess of 18%. The lowest was 2.6% early in 2021.

Lobo also highlights the challenges faced by renters in the housing market. Increased interest rates and housing costs have led to a rise in rental rates, sometimes matching or exceeding the cost of mortgage payments.

"If you're not an existing homeowner, mortgage rates are high and the cost of homes are high too, so people rent," he says.

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  photo  Contributed photography / Bento Lobo, head of finance and economics in the Gary W. Rollins College of Business at UTC.
 
 

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