A Shifting Housing Market

A Balanced Approach to The Housing Market

The first half of 2022 has ushered in a shift in the housing market. Whether it’s a change in mortgage rates, inventory, or prices, it seems like every week brings in a new challenge for buyers and sellers to overcome. And like most things in life, navigating change can be challenging and expensive.

Price Adjustments

Sellers are beginning to see a change in the housing market that we haven’t seen in years, price adjustments. Homes that would have been under contract within days of being on the market, are now remaining on the market for weeks. In part, this is happening because homes are priced at levels from three months ago. After all, every seller wants their home to set a new record for price and offers received.

Take for instance a homeowner who has been watching their neighbor’s homes sell for above the asking price within hours of a for-sale sign being installed. Let’s say the last home that sold in your neighborhood was listed for $800,000 and sold for $1,000,000. You may be tempted to sell your home and take advantage of this opportunity of a lifetime. However, before you call an agent for a listing presentation, it would be shortsighted to assume you can list your home for $1,000,000 and experience similar results as the last home that sold.

On average, it takes about two months for a home to sell in the hottest housing market. This considers the time from when the home is listed on the market to when the closing occurs. Therefore, your neighbor’s home which sold for $200,000 above the asking price reflects market conditions from at least two months ago.

A recent Redfin study shows that 1 in 5 home sellers dropped their price during the four weeks ending May 22—the highest level since October 2019. Redfin Chief Economist Daryl Fairweather recently stated:

The picture of a softening housing market is becoming more clear, especially to home sellers who are increasingly turning to price drops as buyers become more cost-conscious under higher mortgage rates. For now, mortgage rates have stabilized, and I expect prices to do the same. This will remove some uncertainty for buyers. That means that as long as a home is priced conservatively, it still has a good chance of selling quickly.

Many sellers will become anxious as their home remains on the market for longer than they expected. As a home remains on the market for more than two weekends, and the realization that a peaceful negotiation will replace a bidding war, sellers will carry the once unthinkable burden of lowering the price of their home.

Some markets across the country may be immune to this shift. However, for most markets, this shift will be a reality that sellers will need to accept. The shift will be subtle at first and almost taboo to speak about in most neighborhoods. After all, who wants to own the home that sticks out like a sore thumb with a for sale sign in the front yard for weeks, or worse, held multiple open houses.

It’s important to note that lowering the price of your home is not a reflection of the pride of ownership your home exhibits, it reflects a shifting market that will not always be setting records.

To Own or Not to Own

A major factor driving the shift in the housing market is rising mortgage rates. A pre-approval letter from one month ago may have an interest rate that a lender cannot honor today. Buyers may see a difference of $500 a month in mortgage payments with every 1% shift in rate. The change impacts their debt to income ratio, which is a driving factor in how much a buyer can borrow. Some buyers will opt to rent a home as they see their purchasing power decrease. As a result, demand for homes on the market will also decrease.

As mortgage rates rise, buyers become less anxious to purchase a home. According to the Mortgage Bankers Association, mortgage applications fell 6.5% in the week ended June 3, marking the fourth consecutive week of declines in mortgage applications. Lower mortgage applications directly impact sales of existing homes. A recent article published in the Wall Street Journal stated the following:

Sales of existing homes in April fell to their slowest pace since before the pandemic. But even with sales slowing, home prices continue to rise thanks to a dearth of homes for sale. That means many would-be buyers are struggling with the twin challenges of double-digit jumps in home prices and higher borrowing costs.

In addition to higher mortgage payments due to higher mortgage rates, rising home prices increase the amount of money buyers need for a down payment and closing costs. For many buyers, especially first-time home buyers, the rising cost of purchasing a home is becoming unaffordable.

Today, a median-priced home in the Washington DC area is listed at $525,000. A buyer in the Washington DC market who has been shopping for a home for over a year will need to have received a 25.1% increase in income to keep up with the rise in home prices in their market.

Buyers who cannot keep up with the rise in home prices will opt for the rental market. However, the rental market will not offer much relief, if any. In May 2022, the rental market in America showed a month-over-month increase of 2% and a year-over-year increase of 15.2%, bringing the average monthly rent to $2,002 per month, according to data from Redfin.

In the Washington DC market, where home prices remain elevated and inventory is low, the average monthly rent has increased to $2,681 per month, which reflects a 12.5% increase compared to the same time last year.

Homeowners Dilemma

Homeowners face a different dilemma which is contributing to the low inventory of homes for sale. A current homeowner who purchased their home more than two years ago will find themselves locked into their current home for the same reason first-time homebuyers are locked out of their first home. A homeowner with a mortgage rate below 3.5% will be reluctant to sell their home if it means acquiring a mortgage that’s above 5%. A higher mortgage rate, in addition to a higher home price, could add more than a thousand dollars per month to a homeowner’s mortgage payment. For many homeowners, the cost-benefit of selling their home and buying a new home does not make financial sense.

The underlying factors for a housing crisis, not a crash, remain in place. Across many parts of America, buyers continue to face rising mortgage rates and a low inventory of homes. Economists surveyed by Zillow agree that we are not in the midst of a housing bubble:

The most popular reason respondents rebuffed the bubble thesis was strong market fundamentals, including demographics, scarce inventory, and shifting housing preferences. Low credit risks as a justification followed, due to sound loan underwriting and the overwhelming share of fixed-rate, fully amortized mortgages.

Conclusion

It’s important to understand that as the housing market shifts, so should expectations. We have experienced a few years where shifting expectations favored sellers at the expense of buyers. The latest shift in the housing market has introduced a balanced approach, where both sides will need to shift their expectations.

As price adjustments become common, so will the opportunity for buyers who were once priced out of a seller’s market to reenter a balanced market. A balanced market will allow buyers to purchase a home without competing with multiple offers and waiving contingencies. Sellers may be reluctant to accept this new reality, but the sooner they do, the sooner they will replace the for-sale sign in their front yard with a sold sign.

Those waiting for a housing crash may feel excitement as they see home prices fall and days on the market rise. However, we are far from where the residential housing market was during the last housing crash. It’s important to remember that homeowners today are not facing the risk of foreclosure. For the most part, they are choosing to sell their home because they need a bigger home or they wish to live in a different location.

Choosing to sell your home on your terms is far different from being forced to sell your home on the bank’s terms.

Photo by Yan Ots on Unsplash