Market Shift
As we enter the 2022 Spring - Summer traditional selling season, there’s lots of talk about a “market shift” as a result of the rapid increase in mortgage interest rates over the past few months. Yes, true, and in this post I am going to address what that all means.
First, let me get a few things out of the way right up front.
The market has shifted - we are not talking about something that is going to happen. It has happened and very quickly. And, this is the most significant change in the market since late 2012 early 2013. If we were talking about earthquakes, this could be the big one. Or to use another analogy, this is a perfect storm of higher interest rates, stock market volatility, and global uncertainty.
I personally consider what’s going on in the market a “rebalancing” which can be quite healthy under certain circumstances.
I also still consider this a good time to buy, sell or invest - but within certain parameters.
I do not think we are in a bubble or that prices will collapse. Soften or flatten, sure. But this is not 2008 redux.
“The National Association of Realtors (NAR) just issued a report calculating that the cost of purchasing a house in the U.S. has increased 55% year over year since 2021 after factoring in home value appreciation, tax re-assessments, and mortgage rate increases.”
DON’T GET TOO CAUGHT UP IN THE HYPE
Recently the CEO of Redfin stated that “Sellers are starting to freak out”. That can probably be expanded to include Buyers and anyone else in the transaction chain such as agents, lenders, appraisers, escrow companies, etc. Arguably, right now Buyers are freaking out more than Sellers. But, let’s not. In any market there are always opportunities and some planning can go a long way towards the outcome you are seeking. No, that doesn’t mean rates are going back down to 3% or inventory is magically spiking. But it does mean you have options.
HOW DID WE GET HERE?
For most borrowers the rates they are now getting have spiked more than a full 2% points from where they were at the beginning of the year. Here’s what that means in real numbers.
A $1,000,000 mortgage at a 3% rate is a principle and interest payment of $4,216. At 5% that same loan amount is $5,368. That’s an increase of $1,150 per month which is substantial. For buyers who were on the cusp of qualifying previously, they are now priced out of the homes they wanted.
On top of that, people are not feeling as wealthy now as they were last year when everyone’s portfolio or retirement accounts were going strong with the stock market hitting all time highs. And many people were also dabbling in crypto and seeing huge speculative paper profits. When people feel wealthier - even if it is only on paper, they are more likely to stretch their housing budget. For those who’s down payment was in the market, well they are probably done as buyers for now.
Let’s throw into the mix the 40 year inflation high we are now seeing. When people are paying more for gas, food and everything else they need, don’t expect them to stretch their housing budget.
Lastly we have the global uncertainty with a lingering pandemic, war in Europe and the supply chain issues.
So, it is no surprise that the housing market is already feeling the pinch. And we’re just at the beginning of this cycle.
HERE’S WHAT I AM SEEING / HEARING
More price reductions.
Longer days on market.
Fewer showings and offers.
Inventory going up.
Less competition for Buyers.
Who thought we would ever be talking about price reductions again but here we are. And it happened very quickly. Depending on the neighborhood, I am seeing anywhere from 10-25% of the listings showing reductions. Now clearly some of these properties were either crazy over priced to start with or just not very desirable. But others that would seemingly have gone into escrow quickly are now lingering.
That means we are seeing longer “days on market” than previously. We are still well within the parameters of what is considered a Seller’s Market but the trend line has started to shift.
What is most surprising - and I have heard this anecdotally from a number of other agents, is that the turnout for Open Houses and requests for private showings are both down. Same with offers. Where 6 months ago we might have seen 10+ offers on any hot new listing, now I’m hearing that agents are getting 2-3. And that’s when they get offers. I’ve heard that some agents who have put deadlines for offers after the weekend are winding up with - no offers. Ouch.
Also, and this is not unexpected at this time of year, is that inventory is going up. But that is relative. Inventory is still historically low but better than it was previously.
For Buyers, with less competition they are starting to feel emboldened. I recently was able to get a $20K closing credit for one of my Buyer clients. A year ago that would not have happened.
MOVES TO MAKE NOW
If you are in the market as a Buyer or Seller, here’s what you need to know right now.
SELLERS: you can not expect to see as many offers as a few months ago, list prices to get bid up as much, or some of the extremely favorable terms that Sellers were able to extract from Buyers over the past few years. The faster you adjust to these realities, the sooner you home will be in escrow.
Now, more than ever, preparing your home for sale (painting, repairs, updates, etc), is crucial. Buyers will still pay top dollar for homes that are move in ready.
Also, you will need a lot more than just a yard sign to get the highest price. So multi media, vast exposure and reach and other traditional selling points are more important than ever.
BUYERS: you may not have to go as high over the list price or waive all of your contingencies. You also may have less competition as others have dropped out of the hunt.
What I see some Buyers doing is switching from the 30 year fixed to ARMS. In most cases 10 year ARMS. I also see more Buyers paying points to lower their rates.
If you see a property on the market for a few weeks, don’t be shy about making an offer at the price that you want to pay. And if you get into escrow, don’t shy away from asking for repairs or credits.
This market may be the “buy” sign you’ve been waiting for.
“We’re entering a period in the Real Estate market where Sellers think it is the Summer of 2021 and Buyers think it is 2009.
In other words a perception gap that you can drive a freight train through.”
AGENTS AND BROKERAGES: No one wants to hear any “happy talk” right now. No Buyer wants to hear that rates are still historically low. That doesn’t seem to matter to Buyers who have been planning, saving and making offers on properties and still haven’t found anything who are now priced out of the neighborhood or home they wanted.
What you should do as an agent is get back to the basics. That may mean working a whole lot harder than you had to do the last few boom years. Sorry.
If you own or are running a Brokerage with multiple agents, best to have some candid discussions and right size your business.
ARE WE IN A BUBBLE
Most people who are a lot smarter than me don’t think so. I don’t either. Here’s why.
The job market is very strong and anyone in a house right now is not going to be doing a strategic default if they have a change of circumstance. If need be, most current home owners can sell and cash out a ton of equity if need be.
Lawrence Yun, the chief economist for NAR has stated that “housing kept the economy afloat as home prices rose and buyer demand intensified. However, this year has already thrown some curveballs, including record-low inventory and unyielding inflation.”
Citing a five-month decline in pending home sales, as well as a drop in newly constructed single-family sales, Yun predicts the higher mortgage rates will slow the housing market. Slow does not mean collapse and slower is the shift that everyone will need to adjust to.
Back to the Redfin CEO, he says “instead of engaging in bidding wars homebuyers are simply setting their sights on other markets that have more affordable housing.”
Business Week recently polled 32 top economists. While most did not think we are in a bubble (yet), 6 of the 32 did predict a flattening or drop in prices.
HERE’S WHAT TO WATCH
Inventory
Price Reductions
Time on Market
Interest Rates
Stock Market
Supply Chain
Global Events
“Disruption creates opportunity so
when markets shift, those who quickly adjust will prosper.
As in the stock market, the trend is your friend.”