It's the question on everyone's minds- what is the real estate market up to? The economic news is changing fast and it is proving to be a challenging market for buyers and sellers alike as some folks are having to make hard decisions in order to accomplish their goals.
Read on below for the market as we see it. This week we take a look at the national real estate market. We will write a local update when the September numbers come out at the end of the month.
Market Update- What is happening nationally?
1. Persistently high inflation continues to be the thorn in the side of the economy. In response to high inflation rates the Fed has chosen to increase interest rates at a very rapid pace. This week, the Chair of the Fed, Jerome Powell, went so far as to say that he understands that the Fed's moves to cool the economy will likely cause a correction in the real estate market. The resulting rise in mortgage interest rates has had a significant impact buyer's purchasing power. Here is an example of how much it's changed since March of this year:
A $500,000 Mortgage at March's interest rates of 3.75% = $2,315 in principal and interest
Mortgage rates have crept as high as 7% this year, but are currently around 6.75%
That same $500,000 Mortgage at today's 6.75% = $3,242 in principal and interest, about a $1,000/month difference.
$1,000/month of increased mortgage payment reduces a buyer's purchasing power by about $150,000. Sheesh :( As you can imagine, that has been hard to stomach for many buyers.
2. That real change in affordability, along with talk of recession concerns in the media, is having an impact on buyer confidence in the real estate market for regular consumers and big time investors alike. There is a sense that many buyers are holding out to see how far this correction goes before making an offer, effectively adding more downward pressure on prices. As a result, it has been common to see some sellers making price reductions of 5%-10% of their original list price before attracting a buyer.
That isn't as bad as it sounds though, because during the absurdly hot spring market values were pushed so high that even after taking price reductions this fall, sellers are still mostly selling at values that are at an increase from where they would have been in 2021. This is a testament to how much demand there still is amidst a significant affordability crunch. And while it's true that some sellers are having to drop their prices in order to sell, some sellers are still selling in the first weekend on the market and for full price. It's a mixed bag out there!
What we know and what we don't:
Do we know how long this correction will persist? No. A few months? A few years? There's now way to know for sure. Here is how the best and brightest have fared in their predictions so far this year: Most experts would have agreed a few months ago that real estate values would likely appreciate at lower rates or be flat heading into 2023, rather than make any kind of correction. Early in the year many economists argued that high rates of inflation would be transitory and would quickly subside and they haven't. Also, many seemed to think that the Fed would be able to have a larger impact on inflation than they have at this point. Most mortgage rate predictions, as late as June and July, had the second half of 2022 finishing out in the mid to high 4's. We're currently at 6.75%. At this point, all that really seems clear, and abundantly so, is that predicting much of what will happen in the near future is something that we're all consistently poor at. Luckily over the long term though, we have a much higher rate of success.
Do we have a high degree of confidence that this correction will be a momentary one and at some point in the next few months or years real estate values will make their way back up and surpass 2022's highs? Yes. Housing, along with the stock market, has always reached new highs after each recession that it's experienced. We've been through many. Some long and some short, but they all end at some point. An important thing to keep in mind for this one is that we still have a large deficit of housing across the US and even more so in our particular area. The resulting unfilled demand will continue to build up as we are already seeing home construction taper off due to slower sales for builders in the past few months. If we think of housing demand as a rubber band, it was stretched upward, higher than it should be, due to pandemic related forces in the beginning of the year, and in just a few short months it is now being stretched downward, lower than it should be, due to the rapid rise in interest rates. There are many would-be buyers that need housing that have been temporarily priced out of being able to purchase a home that will still be there when affordability balances back out.
Thoughts to consider for Buyers:
1. Now is the time for negotiating with sellers. Interest rate buy downs, seller concessions, and inspection items are all on the table.
2. If you buy, be ready to stay for 5 years. Sit tight. Once you own your new home, don't worry too much about value fluctuations. Sit tight, stay in your home, and enjoy! Home valuations can go up and down some. If you need to move, have a back up plan for renting out your home if market conditions aren't favorable when you would want to sell. Also, keep your eyes out for lower interest rates down the road. There could be great opportunity to refinance to lower your monthly payment.
Thoughts to consider for Sellers:
1. If it's time to sell, price competitively in comparison to your competition. Sellers on the market now need to be the clear winner with regard to value so they beat out the competition.
2. Take time to prep your home for sale. You only get one chance at a first impression and now is the time to make sure that first impression is spot on.
3. Many "Zestimates" are inaccurate at the moment. The market has changed and online valuation calculators have not caught up.
Thoughts to consider for Investors:
1. It's a great time to put solid long-term tenants in properties and hold on to your low interest rate mortgages. For however long this correction goes on, it will be those that still own real estate as the market picks back up that will be able to take advantage of the often significant gains that are realized during the post-recession/correction recovery period. Although there may be a temporary dip, we will likely see substantial cash flow growth on long-term rentals as the continued lack of housing supply puts upward pressure on rental rates in the coming years.
2. If you are growth-oriented, taking some cash out now and sitting on the sidelines for a while could be a winning play. Should this correction continue downward for some time, there may be a point where some homes are selling for below their market value and those with cash on hand will be able to find some good deals.
Want to learn more? If you want a deeper dive into the market forces that are involved in a real estate market correction and how to make smart decisions as you navigate one, I highly suggest "Recession Proof Real Estate Investing" by J Scott.
As always, don't hesitate to reach out if you have questions about your particular situation. We'd love to hear from ya!
