|Real Estate Market At A Crossroads written by Jim Busby|
|After a 26+ month run of unprecedented growth and prosperity, the real estate market has come to a crossroads of sorts. Much of the growth and activity that has occurred during this period is simply unsustainable beyond a certain point, and market watchers have predicted that some sort of correction – or at least, moderation – would take place in the coming months. While that growth stubbornly persisted longer than expected, we are finally seeing measurable data that indicates that this long-predicted correction is beginning to kick in. |
What Happened Over the Past 2 Years? Since the beginning of the COVID pandemic, factors that either drove or resulted from market growth include: Work From Home (WFH) – The option to work from home led to many homeowners “upsizing” to larger homes to accommodate home offices, and to provide additional space for their kids to home-school. Even for those who stayed in place, the expansion of their current homes became a priority and drove a boom in “home improvement” with such companies as Home Depot and Lowes being big beneficiaries.
Relocation/Early Retirement(or at least, moving to a retirement destination) – The option to work from home allowed many workers to accelerate their plans to move to their dreamt-about retirement location ahead of schedule. Rather than wait 5 years to buy that long-anticipated retirement home in Montana, or Colorado, or at the beach, they simply made the move while continuing in the same job from a different location. It’s worth noting that much of this relocation has now taken place, so will have a more modest impact in the future.
Availability of Homes to Buy – In the early COVID days the inventory of homes was approaching 5 months supply, but has subsequently decreased to a current level of less than 2 months supply. According to the basic economic rule of supply and demand, as the supply (measured in months of inventory) goes down, prices go up. There are more buyers chasing a limited (and decreasing) number of homes, and prices are driven up.
Rising Prices and Appreciating Home Values – Based on the supply/demand issue cited above, prices have risen on homes, which in turn has driven the value of existing homes to all-time highs. For example, a June 7, 2022 Zillow report indicated that home values rose 21% from April 2021 to April 2022. This represented the 13th consecutive month of record-breaking annual home value appreciation.
Low Mortgage Interest Rates – Historically low mortgage rates enabled first-time buyers to enter the market; “move-up” buyers to go to larger more luxurious homes; and WFH “relocators” to move to dream locations well before traditional retirement age. While rates were at all-time lows for much of the past 2 years — including a lengthy period of time below 3% — this advantage has disappeared during the past several months as seen in the following numbers: The 30 year fixed-rate mortgage was 2.68% in December 2020; 3.52% in December 2021; and 6.125% on June 14, 2022. The Federal Reserve increased its rate by .75% on June 15 as a step toward controlling inflation. One of the many unfortunate consequences will be a further hike in mortgage rates which will put buyers at an even greater disadvantage.
Buyer Fatigue – One of the big negatives with the rising prices and rising interest rates is that many prospective buyers cannot find an affordable home. Many have gamely fought off obstacles and continued their search despite rising prices and interest rates, as they are driven by the dream of home ownership. Many have fallen victim to FOMO (fear of missing out) as friends and acquaintances buy homes. But they eventually come to grips with reality. The term “buyer fatigue” aptly describes the way many house-hunters feel when going through the process. A recent Zillow survey showed that 50% of homebuyers cried at least once during the homebuying process, and rated the stress on the same scale as planning a wedding or being fired from a job. It was particularly bad for Gen Z first-time buyers who were often competing with cash buyers who had a marked advantage in negotiations. The combination of high prices, low inventory and rising mortgage rates has forced many prospective buyers to simply go on hold.
Home Equity at All-time High – One of the biggest positives that has come out of the recent run-up in value is the home equity built up by those who bought homes earlier in the cycle. The simple definition of home equity is the value of your home minus what you owe for the home. A recent report from Black Night, Inc., a mortgage lending analytics firm, indicated that the collective amount of money mortgage holders could pull out of their homes while retaining 20% equity rose by an unprecedented $1.2 trillion in the first quarter of this year. The total of this “tappable” equity stands at $11 trillion. This number is a not-so-subtle minder of why so many everyday people view home ownership as a key investment, and also an excellent hedge against inflation.
Will there be a “bubble”? – A logical question to ask is if the real estate market might suffer through the same sort of “bursting bubble” that occurred in the 2009/2010 timeframe when the extremely active market came to a screeching halt, and homeowners defaulted in large numbers. At that time, thousands of foreclosed homes came on the market at greatly reduced prices, and caused collateral damage throughout the whole market by effectively lowering the value of many other homes owned by responsible people. Most market experts do not believe we will see a repeat of this because the situation is different in several ways. The main difference is that lending requirements – largely because of lessons learned in the defaults during this early bubble – have been tightened and rigidly enforced to ensure that borrowers are credit-worthy and capable of making this type of purchase. Additionally, in this earlier bubble there was an oversupply of homes for sale which gave buyers the upper hand in negotiations. As mentioned above, the current inventory of homes for sale is very low, and represents only 50% of what the available inventory was during the 2006-2010 market. In short, prices will almost certainly level-off from their current rate of appreciation, but they are unlikely to go down. Many market experts have recently revised their appreciation rate expectations for 2022 from 10+ %, to a more moderate 5-6%.
Summary – Over the past 45 days the high prices, rising interest rates and inventory shortage have finally reached a point where many buyers are priced out of the market. With inflation and interest rates rising to levels we have not seen in years, both the number of real estate transactions and the appreciation in values will be greatly reduced in comparison to the last several years. We expect to see prices become much more normalized (perhaps 4-7% appreciation in the coming year), but they are unlikely to actually decrease. In this same vein, we do not expect to see a “bursting bubble” with a rash of foreclosures as was the case in the 2009/2010 crash. A more “balanced” and orderly market will evolve where sellers and buyers are on more of an equal footing in negotiations.
We hope that this helps improve your understanding of what is going on in today’s market. And as always, I will remind you that I am available to help you – or any of your friends or acquaintances – who are looking to buy or sell property. My experience as a real estate broker, homebuilder, and owner of Wrightsville Beach rental properties provides a wide-ranging perspective that will help me assist you in your search. Please feel free to contact me. And finally, I am including the link below to our newest version of the Intracoastal Realty mobile app which provides you with ready access to virtually all active properties in our market.
Wrightsville Beach by Connor Barth
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June 2022 market update written by Jim Busby and published on our blog by Sherri Ingle