A lot of people have been reading that our real estate market is going to shift soon, from a sellers’ market to a buyers’ market. Rebekah and I are getting more and more of the same questions about these articles, but they all boil down to the two most common question: Is it true? What does it mean to me?
We think that a normal, cyclical shift to a buyers’ market is coming, and should be here by next summer. There are three indicators that lead us to our conclusion – falling cap rates, falling new home sales, and most importantly rising mortgage interest rates.
First of all, falling cap rates for investors is interesting. Fully stabilized, non-value-add properties have softening cap rates — as much as 25 basis points. This is mostly due to flatter rent projections and more volatile interest rates.
This means that less buy and hold investors are buying, and more are profit taking by selling. We have noticed that these listings usually start at 15-20% above market and slowly work themselves back, initially seeking an elevated price but gradually falling back to where a full set of comps would forecast the property in the first place. In other words, “pushing value” on a listing is working less and less these days.
Secondly, a slew of figures released lately give ample evidence of at least a cooling starting already. Nationwide, existing-home sales dropped in June for a third straight month. Purchases of new homes are at their slowest pace in eight months. Inventory, which plunged for years, has begun to grow again as buyers move to the sidelines, sapping the fuel for surging home values. Prices for existing homes climbed 6.4 percent in May, the smallest year-over-year gain since early 2017, and have gained the least over three months since 2012, according to the Federal Housing Finance Agency. Shares of PulteGroup Inc. fell as much as 4.9 percent one fine Thursday morning after the national homebuilder reported that orders had declined 1 percent from a year earlier, blaming rising mortgage rates.
Still, market watchers note that the housing sector has strong support from a healthy labor market and steady economic growth, which indicates a stabilizing trend for home prices rather than anything close to the experience of the crisis in 2008, when property values plunged. And shares of D.R. Horton Inc., which builds a lot of starter homes, rose as high as 8.7 percent that same Thursday morning Pulte took a hit after the company reported a 12 percent jump in orders.
“The rate of home sales, new and existing, has probably peaked,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics. “But it’s not going to roll over. It will gently decline.”
Home Prices Expected to Begin Leveling Off Next Fall
Home prices, which have been on the rise for 4 years now, are expected to slow to 3% appreciation by October of 2018, according to Zillow, which will be a sure sign that the market is shifting.
“The housing market has been favoring sellers for the past few years,” said Zillow Chief Economist Dr. Svenja Gudell in a press release. “Sellers in the current housing landscape often have the luxury of listing their home ‘as-is’ without fixing it up or with only minimal window-dressing since demand for homes has been high and inventory low.”
“It’s common for sellers to receive multiple bids, and in the hottest markets, sell for over asking price, but these conditions will change in the future,” she said. “As the number of homes for sale increases and home value appreciation slows, we expect the market to meaningfully swing in favor of buyers within the next two to three years.
Here’s the back story: The average rate for a 30-year fixed mortgage hovered below 4% for much of 2017. Then, at the start of 2018, it began a steady upward climb that lasted for three months. On July 6, 2018, the average 30-year mortgage rate was 4.52%. That was an increase of 57 basis points (0.57%) from the first week of January. So clearly, rates are higher now than at the start of the year. And the Fed has made it’s intention to continue to raise rates well known.
In June 2018, the Mortgage Bankers Association (MBA) updated its long-range forecast. They predicted that average 30-year mortgage rates would rise to 4.9% by the fourth quarter of 2018, and inch upward in 2019 as well. Economists from Freddie Mac made a similar prediction recently.
There’s no doubt that the housing market currently favors sellers with low inventory driving competition and pushing prices upwards. However interest rates are on the rise, and as they go up, an average buyer’s buyer power is dropping, if all other things remain equal. This can’t help but dampen demand. Buyers are getting squeezed by rising mortgage rates and by prices climbing about twice as fast as incomes, and there’s only so far they can stretch.
When sellers quit seeing buyers making offers on their homes, they will follow the investors in slowly working their listing prices back until the property sells. This gradual process is how we will find a new “normal”
Are we looking at another crash?
No, and not everyone believes the market will shift so soon.
While Zillow’s survey indicates that home prices will start to level off, another recent report actually predicts that home prices will remain high throughout much of the country for the next two years.
The Fall 2017 edition of The Housing and Mortgage Review® released by Arch Mortgage Insurance Company indicates that there’s little chance of a housing bubble, with data showing the chance of home prices dropping over the next 2 years in the nation’s 401 largest cities averaging only 4%.
The economy is strong and employment is high, so there is steady demand for homes in most housing markets across the country. A modest rise in mortgage rates probably wouldn’t do much to dampen it
So what does it mean to you?
East Valley Metro Phoenix is projected anywhere from 2.26% price growth to 4%. With inflation forecast at between 2.1 and 2.2% across the board, it effectively represents a stalling of home values. This is great news for buyers and less than thrilling for sellers.
So the message is simply this, if you are a seller now is really the best time to sell. The market is at or close to the peak for this particular business cycle.
But here is the thing, if you are a buyer, you really don’t want to wait for the buyer’s market to buy, and here is why – you will miss out on whatever capital appreciation is left in this cycle. Prices will continue to go up for the next 6 months to a year, and buying then will either simply cost you more for the same house, or you might have to qualify for less of a home than you can today.
If you have ANY questions at all, please call Rebekah or I, because we are studying this and really can help you.
If you are a buyer -call before the end of the month, and we will make sure you have a home warranty in your next home at no cost to you.
If you are a seller – call before the end of the month, and we will make sure you get a full market analysis of your property so you can decide if you might want to trade up or take some profits now.