Review of all things Real Estate
Last updated 8/3/2022 at 12:39pm
So what kind of market are we currently in? Seller's market, buyer's market, neutral market? By all current indicators we quickly moved from a seller's market to a neutral market. By the market action index, where 75 or greater is a strong seller's market and 30 or less indicates a buyer's market, as of the date of this article we currently sit at 48 which is right about half way between seller's and buyer's market, and for which I am going to characterize the market as neutral.
In May, the needle was at 75 which indicated a strong seller market. This past week, the needle was pegged at 48 from the previous week of 52 (which actually appears to have stabilized week to week).
Instead of multiple competing offers above list price, as has been the case for the last two years, we are seeing longer market time and about 1/3 of the local prices dropping. For the last two years, sellers could literally pick a number to list the property and buyers would line up to make offers. Buyers were often given 15 minute appointments to walk through then decide if they wanted to compete for the property which meant they had to write offers well north of the list prices and often remove contingencies (buyer protections) to even get their offer looked at by sellers.
Buyers were asked to make home purchase decisions in less time than people normally take to purchase a pair of shoes. To close the deal, buyers had to have cash to make up the difference in the event of lower than contract price appraisals which remarkably didn't happen much the last two years; the appraisals were largely coming in at contract price even though contract prices often felt very inflated.
But with higher interest rates (interest rates double in the second quarter of 2022) and inflation at 9.1% (and rising), buyers' confidence to make purchases at elevated price levels is waning; buyers got discouraged by the previously stiff competition and high prices, so now a lot of them have chosen not to compete....at least for now.
While nationally and locally there are still not enough housing units to satisfy demand, many buyers are increasingly not moving forward with an offer. In our markets of Fallbrook and Bonsall, there are currently 163 active residential listings. In pre-COVID era, the number of active listings would be closer to 300 at this time of year so clearly there isn't enough inventory on the market.
That being said, average days on market currently sits at 42 while for the month of April 2022 average days on market was 19. We have more inventory, but it is sitting longer due to the aforementioned reasons. It's certainly understandable that with buying power diminished by higher interest rates and inflation that competes for available funds and a lack of confidence in the economy that buyers are increasingly sitting on the sidelines thinking (hoping) prices will come down in a wholesale manner.
However, the 800 pound gorilla in the room is the prospect of recession. Economists from Realtor.com, National Association of Realtors, and even the Treasury Secretary insist recession isn't possible (or at least likely) because of nearly full employment and employers having to pay signing bonuses and higher than comfortable wages to attract workers. But if everything is more expensive, then higher wages are an empty promise.
What value is $18 an hour wages when gas is $6.50 a gallon? Recent hikes by the Federal Reserve in the prime lending rate, while designed to slow consumer spending by making consumer credit more expensive, has ironically had a quelling effect on rising mortgage interest rates as my loan officer partner Martin Quiroz reported during our daily morning phone call that the rates have actually improved by a countable amount.
It follows then, if mortgage money becomes less expensive and prices drop a bit, maybe we'll see buyers returning to the real estate market place to buy up some of the recent increased inventory. We could be seeing a return to normalcy in our real estate markets (credit Chris Hasvold for that description).
But unless economic conditions improve and stabilize, then I do foresee real estate prices falling, at least a bit. Home owners enjoyed 18-20% value appreciation for each of the last two years so expect that they may give back a little of their gains if prices soften. If we go into full-on recession, then we'll need to rethink our real estate expectations.