Omg You Must Be So Worried About the Real Estate Market…are you?
Sometimes being a tax-paying, law-abiding citizen in the United States makes you feel like you’re Grandpa Joe in Willy Wonka’s factory. You have zero control of the situation or path you’re on yet you’re allegedly a responsible participant. There’s one person calling the shots who is clearly mentally unstable yet is allowed to continue a reign of chaos without interference. Every time something goes alarmingly wrong, no one acts quickly to fix it. Instead, men wearing comical amount of makeup come out to publicly offer their own divine opinions enveloped in an ominous warning with zero helpful advice in tow. A part of you wishes that you were still confined in your home for a seemingly endless amount of time, for while it was imprisoning, at least you could safely observe the madness from a distance in the comfort of your own bed.
While sadly our economic situation doesn’t boil down to a moral dilemma as to whether or not to give away the secret candy you’ve been entrusted with to a competing chocolatier, all set within a fever dream of a European Candy Factory, it similarly feels like a sleep paralysis nightmare.
My father is an eternal optimist – when my appendix burst, he told me that was just the flu and I’d feel better in a day. I’ve become more of a realist with age, bludgeoned into accepting the truths in life by both the dating scene in New York and my metabolism at age 34. So I feel like my dad in saying this…while I know the situation is unnerving, there are optimistic angles to this current real estate market, both for buyers and for sellers.
So this month we’ll cover why this stretch we’re in isn’t just a bad trip during a diabetic coma, instead focusing on perspective and the quiet opportunities at the moment.
First, a bit of perspective.
Before touching on the present, let’s review the past so we approach the current situation from a grounded mind space. It goes without saying that 2021 was unusually robust and artificially exaggerated due to a perfect storm of market parameters that may never realign again in our lifetime. 2020 is also not a normal comparison year as most of the trends were reactionary and based off events that are (*knocks on every piece of wood in her apartment*) unlikely to happen again with the same dramatization. However both markets experienced something that is currently building right now: delayed decision making and growing pent up demand.
In looking back to the most recent “normal year” before the world flipped upside down, people are forgetting what defined the market in 2019. At the start of 2019, rates on a 30-year fixed rate mortgage ran between 3.95% on the low end and 5.34% on the high, which was considered favorable. 5.34 million existing homes sold in 2019 (the same as 2018)….it was 6.12 million in 2021 and 7.08 million in 2005. 683,000 newly built homes were sold in 2019 (about half of 2005), compared to 822,000 in 2020 and 770,000 in 2021. There are roughly 4 million more Americans today than there were in 2019. The average US home is now 39 years old and in need of repair and upgrading to meet new energy efficiency and safety codes. The US has averaged building a little over 1 million homes for the past 14 years. We built 1.87 million homes on average per year in the 5 years leading up to the 2008 crash.
Now back to the present…
The shift in the housing market was noticeable back in early May, albeit subtle. Buyers began to pull back as rates started to climb, seen with lower activity for listings and also waning urgency to act on those listings. Fueled by buyer fatigue and the steady rise in interest rates, the tide that once heavily favored sellers shifted, pointing now towards buyers.
The change buyers have seen
We are just coming out of an insufferably hot seller’s market, where buyers had to approach every listing anticipating to go over ask, waive financing contingencies, forgo inspections, and often times compete in a bidding war. While many landed homes with stellar interest rates, a large contingency of buyers got continually trampled by seemingly heartless sellers, watching homes go for prices over their reach and the historically low rates slip away.
While all buyers seeking financing are perturbed by the bump in rates, it’s hitting the first time home buyer category this worst. This bracket wasn’t around in the 1980’s to experience double-digit mortgage rates so the jump is a jarring sticker shock compared to the comically low rate in 2021. While everyone knew the post-covid rates wouldn’t last forever, it was an irresponsible benchmark made for many and their perception of purchasing power has been eroded. For many who began their search in January 2022, they went through the wringer with countless bidding wars and now they get to re-write the playbook. While rates are higher, we’re no longer seeing buyers forgo inspections, waive their financing contingency, and pay well over the asking price. However, with readjusted carrying costs due to those higher interest rates, purchase prices that were formerly within reach are intangible and the market is slowly acquiescing to that reality in order to get deals done.
The reality for buyers now
This quick acceleration of interest rates has lead buyers to adjust their expectations of home purchase affordability. It’s as if they laid out all their wish-list items and are methodically sifting through each one to see what’s truly important to them in their next home. We are also digging deep into what “move-in ready” means to them. Similarly, a buyer’s immutable requirement to have a house with 4 bedrooms may give way to 3 bedrooms if the house has a large Family Room, for example.
From a power standpoint, buyers are walking up to listings without competition and are carving serious dollars off of the asking price. While the inventory is still slim because most would-be sellers need to buy on the backend of the transaction, the inventory that is live has accumulated time-on-market due to hesitant/sparse buyers and sellers are accepting far below what 2021 commanded solely so they can move their property. Buyers are scoring fantastic deals with the understanding that if they’re financing, an initial high interest rate is part of the deal but they’ll be able to refinance when rates drop to a more palatable number in the coming 2-3 years.
Again, the selection is not robust by any means but there are some great deals to be had, particularly with apartments that need a bit of work. More often than not, the people who purchase during times of uncertainty are those who make out the best on the backend – take, for example, 2020. Most of my buyers who purchased in 2020 all are seeing a generous appreciation in their apartment, especially those who bought fixer-uppers. The true caveat for the present is being able to stomach that initial higher rate while understanding the promise of the potential upside.
And those buyers that are all cash…are truly king and queen right now.
The change sellers have seen
This next statement should not be news to anyone: the last 18 months have been a chaotically vicious seller’s market. The seat of power sellers commanded was almost otherworldly and buyers were simply pawns to them. Inventory was slim so competition was dire, forcing buyers to waiving contingencies, offer well above ask, and basically put everything on the line in order to land a home. Buyers entered the market expecting to go over ask and fight tooth and nail for an accepted offer. Even after an accepted offer, nothing was safe as sellers sent our multiple contracts and still continued to shop for higher bids. Sellers knew buyers saw the door closing on low interest rates and were able to shamelessly milk the situation. With coops, boards welcomed the high sale prices, as it would help their own resale down the line. The issue many sellers ran into, however, was if apartments would appraise for the sale price or above. Unless the buyer waived their financing contingency, if the appraisal price came in below the purchase price, the buyer could walk if they weren’t able to/didn’t want to make up the difference with a larger downpayment. This was a common issue that plagued the market because recently closed sales reflect a market 4-6 months prior (when they went into contract) which hurts appraisal value and most transactions saw the appraisal coming in under the purchase price. So waiving financing contingencies was almost a required ask by sellers and due to the competition and buyers often had no choice but doing such if they wanted the home.
Well how the tables have turned. Sellers had the power for so long and now are face to face with the reality of being in a very different situation. Rate increases running rampant have severely dwindled the buyer pool, causing demand to drop. The drop in demand coupled with intense buyer fatigue from the last 18 months has brought the market to crickets, with sellers realizing that the gravy train is over. Prices have stopped climbing following their ascent throughout 2021 and certain sects of the market have seen drops between 10-15%. Many sellers have found themselves hopeful for any offer and having to come to terms with what the market is dictating if they want to move their property.
The reality for sellers now
Current sellers who have been watching from the wings the last 12-18 months of the market are most likely a mix of 1) frustrated they didn’t offload in that market 2) begrudgingly acquiescing to the reality of what their property is worth in this market. There’s no way to deny that we are, in fact, in a very different market. The number one thing sellers must do is let go of the comparison to the year prior and come to terms with the current parameters at hand if they want a successful transaction. There are a lot of emotions and definite pride tied to a property one owns and those tend to come out when considering the price that the apartment was purchased for and what the ROI is, if any.
Going into the 2023, sellers can expect a growing number of buyers to be more cautious about making an offer on a home. Sellers need to be cognizant about the importance of delivering value. Gone are the days of frenzied home buying that we’ve seen over the prior months. Sellers need to align their mindset with the new breed of buyers who are patient and need the situation to work on their terms in order for them to move forward – not the other way around.
There are some neighborhoods and property types that are still moving quickly; however the overarching market is fairly quiet so it’s important not to squander interested parties that come in under ask. Most sellers are listing a bit higher than where the market currently is (usually out of the aforementioned unwillingness to acquiesce to the reality of the market) so it’s expected that buyers are coming in under ask, plus all rhetoric is TELLING buyers that they should be! So it is really important that sellers understand that the best shot of getting close to or at ask is pricing honestly so they can move in the first month on market. The amount of interest you receive and number of offers will tell you how you’re priced and you should adjust as soon as possible if all indications point to being overpriced.
Now opposite to having to manage appraisals coming in under, this is uniquely for coops, sellers need to be cognizant of the purchase price because something too low will get rejected by the coop board. Other owners in the building were thrilled to see the price escalation over the last two years because it only helped their own property value. Seeing things drop, which is the natural ebb and flow of any market, is jarring to those same owners, as they interpret it as a potential hinderance to their own property value buyers always look to recent sales in a building to assess value price. Because coops are barbaric, these same owners can reject a sale and not disclose why – yes, this is legal because real estate is stuck in the Middle Ages here – and it is selfishly to protect their own future resale, however unrealistic their stance may be. To combat this, many sellers are working out rebates at closing in order the net price to be honest for the buyer but the listed sale price to skate through the coop.
So enough doom and gloom, there are huge opportunities in this market for sellers. One that stands out clearly, but is possibly not as obvious to all, is the UPGRADER opportunity. What sellers have to remind themselves is that the roles are reversed once they emerge out of the transaction as a buyer and they get to capitalize on the favorable buyers market but for an upgrade. Simplistically, if your market is down, selling a $2 million home for a 10% discount creates a ‘loss’ of $200,000. Buying a $4 million home at a 10% discount could deliver a $400,000 savings on that purchase, netting you a $200k gain. Think balance-sheet, not merely transaction.
As higher mortgage rates force many buyers to buy lower priced homes, the sale may actually deliver a smaller discount, while the purchase for a larger, more expensive home may have fewer competitors as that buyer pool shrinks a bit. You may have more, better choices too and more time to decide. Yes, the mortgage rate will be much higher. But it’s highly likely that when – not if – the FED has to stimulate the economy back into growth mode, the first thing they usually resort to is lowering rates at which point you can refinance.
Economists say there are some grounds for optimism over housing. The past 24 month’s price run-up was driven primarily by rock-bottom rates and evolving consumer preferences for more space, not the loosened lending standards or excessive risk-taking that culminated in the 2008-09 crisis. Supply of homes is still very tight.
When COVID hit hard, many people re-evaluated – often hastily – where and how they wanted to live. Some of these people were highly reactionary expecting the very worst and an extended global meltdown. Many immediately surmised that viral infection and death rates would be far higher in urban centers where the concentration of people was higher. This theory proved to be inaccurate. Some believed that they could only live forever on a farm or a beach cottage or mountain hut without ever having explored that lifestyle. Many of these reactionaries have since realized their thoughts and aspirations were out of touch with their reality and they are re-visiting where they wish to live yet again. Some markets that experienced this insurgence of a new audience were unprepared and under-supplied and home prices surged at levels few thought sustainable. Some of these areas will erode some or most of these gains of the past 2 years.