A Tale of Two (Real Estate) Markets
It was the best of times (for sellers), It was the worst of times (for buyers), It was the age of wisdom (for lenders and realtors), it was the age of foolishness (for buyers), it was the epoch of belief (in low interest rates), it was the epoch of incredulity (buyers watching listing prices sharply rise), it was the season of light (for sellers), it was the season of darkness (for many buyers), it was the spring of hope (for sellers and their agents), it was the winter of despair” (for buyers and their agents).*
Alas (for sellers), the housing bubble is beginning to deflate, though ever so slowly in most places but at a quickening pace in certain overvalued markets where there was an abundance of irrational exuberance and a dearth of common sense.
Logic and caution have begun their (most welcome) return to the housing game, with buyers exhibiting a wee bit less enthusiasm for paying a king’s ransom for homes that only a few years back would have been deemed “wallflower” properties.
But there’s still a dearth of homes for sale relative to the demand (from Millennials, Gen Xers, Boomers, etc.) so prices will keep rising in most locales for a while, albeit at a slackening pace. Lenders like Chase and Wells Fargo are issuing pink slips to some doing mortgages in anticipation of a broad cutback in home loans as interest rates rise (and rise). And firms like Redfin and Compass are giving a few of their employees the boot as they hunker down for America’s version of real estate winter.
Will it be back to the 80s when rates topped 15%? Or will the Fed pull back once they realize that most of this year’s inflation is beyond their (or anyone else’s) ability to control (blame Putin’s war, supply chain issues, COVID-related employment problems, etc.).
Time will tell.
But even during the depths of the early 80s folks bought and sold homes. It just took longer. Once rates fell back to earth, homeowners refinanced, and lenders made out like bandits. Will history repeat itself this time around?
Time will tell.
Silver linings sometimes lurk in the stormiest weather, and this impending downturn may be no different.
The upsides include:
1. A return to sanity from what had for several years been a frenzied, overvalued market
2. Buyers taking more time to examine properties of interest, thereby promoting more rational decision-making on offers tendered
3. More homes coming on the market as sellers become desperate to sell before interest rates climb even further
4. Home inspections once more becoming commonplace
5. Sellers more likely to fix up the home prior to putting it on the market
6. Lenders playing a more critical role in the buying process
7. Top realtors having more time to cater to their clients’ needs
8. A reduction in the number of realtors as the less-experienced (and less-committed) exit the profession
Among the downsides are:
1. Home lenders becoming more selective in deciding who gets to buy
2. Buyers having to downsize their aspirations for affordability reasons
3. Some buyers are deciding to rent due to affordability issues
4. Less work for home inspectors and other property professionals
5. A knock-on effect on housing-related sectors like home furnishings and renovation
6. An increase in foreclosures as certain homeowners lose the ability to make mortgage payments
7. Increasing likelihood of a recession due to the widespread ramifications of surging interest rates and its impact on a key sector of the economy
A reset to residential real estate is long overdue. Too many folks have been paying too much for their new home simply because of unnatural market conditions. A return to normalcy is welcome.
However, there’s going to be a shortage of homes for years to come.
Why?
Home builders are facing surging costs and a critical shortage of workers. Although locales are beginning to loosen restrictions on construction codes (e.g., promoting multi-unit projects) it will take time for builders to adapt and ramp up supply.
This is the reason why home prices will continue to rise this year and (most likely) next (in most locales).
Stay tuned.