New Ground Rules in a Balanced Market
I’m not going to comment on the negative economic headlines because it is a topic that has been well covered and probably one that you would like to forget. I’m also not going to suggest that it is “business as usual” in residential real estate, but more on that later. What I will tell you is that if you have had the good fortune of owning a home over the long run, your asset has steadily appreciated and has been an effective hedge against inflation. Conversely, it has been, and will continue to be a mediocre short-term investment as transaction, carrying and maintenance costs alone are usually enough to wipe out any quick paper profits. So, in the spirit of a long-term horizon and contrary to sensationalized news reports, I’m pleased to report that our local real estate market is alive and well… with a few new ground rules.
To give you some context, during the first quarter of this year, prices increased in excess of 20% in our market, a truly mind-boggling number. This was entirely unsustainable and due to a confluence of events including inflated stock market returns (creating cash rich buyers), COVID (adding fuel to the already overheated demand for homes), cheap money (remember when mortgages were under 3%?) and scarce inventory (sellers wanted to stay put). Then the summer hit and with pandemic fears easing around the world, everyone left town. It wasn’t until last month when we finally had some reliable data about how our market was performing in the new reality of rapidly rising interest rates, employees trickling back to the office, a stock market selloff and broader economic uncertainty. Here’s what we learned by comparing September 2022 with the same month last year:
Unit home sales fell 47%
The median sales price fell 2%
The number of homes available for sale dropped 8%.
Digging deeper, my average third quarter sale received 3.6 offers and sold at 27% over list price compared to 5.1 offers and 34% over list in the same quarter last year. In short, fewer buyers competed for each property, effectively lowering the premium paid on the listing price. If I were asked to write the headline for our local real estate news, it would read something like this: The Number of Available Homes Falls Faster Than the Number of Active Buyers, Keeping Competition and Prices at Historic Levels.
So, what are the new ground rules at this moment?
Buyers are far more discerning. With the doubling of mortgage rates, every dollar matters. I don’t remember a time when the premium paid for recently updated homes in pristine condition was so significant. I think what is happening is that buyers are putting every available dollar into the down payment (to try to minimize the higher financing costs), leaving far less available to do improvements. Homes in need of renovation are realizing prices substantially discounted from those that are updated.
Sellers are slowly resetting their expectations. It is no longer a matter of expecting to receive at least as high a price as a neighbor. Value is determined by very recent sales of nearby homes with comparable features and in similar condition. Indiscriminate bidding wars for nearly every home, no matter the condition or location, is a thing of the past.
There are fewer buyers competing and those that remain are moving down the value chain. Inflated costs of materials and labor, higher carrying costs and stabilizing selling prices have all but eliminated the speculators and home flippers. Higher mortgage rates and lower cash/stock market balances have sent the affordability range of the remaining buyers down. This is most clearly visible at the lower prices where competition remains fierce and higher end where homes are beginning to linger.
Deal momentum is important. In an environment where the economic news cycle is negative and mortgage rates are volatile, buyers do not have the patience for an extended negotiating process. They are often trying to satisfy rate lock periods, time their equity sales, and avoid feeling like they are overpaying in a softening market. Negotiating in good faith, rapidly reaching terms and facilitating a timely closing can make the difference between a transaction staying in or falling out of escrow. Many of today's sellers are operating with a weaker negotiating position than they were earlier in the year… a sign of a more balanced market.
Contingencies are coming back. It has been quite a while since I’ve seen contingencies in purchase offers, but they are showing up with greater frequency. Sellers can reduce the likelihood of contingent offers by offering sufficient inspection reports prior to marketing. Conversely, buyers with high down payments or all-cash should expect to receive a better price than competitors that require standard mortgage financing.
There are deals to be had. Believe it or not, there are sporadic bargains for those buyers willing or able to buy a home that needs substantive updating. Your real estate agent can help you screen for those properties where you might find an opportunity to pay below market prices and build equity by doing strategic renovations.
Given the rapidly changing environment, it’s a fool’s errand to try to predict how things will play out for the remainder of the year. What I do know is that if you have a reasonably long investment horizon, buying a home in nearly any market has been a sound decision. Higher interest rates reduce competition and leave open the possibility for buyers to refinance at lower rates down the road. Scarce inventory creates the opportunity for sellers to reach active buyers more readily, even in uncertain times.
If I can be of any assistance in crafting your next real estate move, please don’t hesitate to contact me.