How is the Market?
One of the most common questions we are asked is “what’s going on in the market?” or “how is the market?” We usually give a thoughtful response, stating “it depends, are you Buying, Selling or Investing?” In this blog we will cover some general events going on in the market, from pending home sales, pricing, inventory and interest rates. If we had to give a blanket response to “what’s going on in the market” we would respond that currently the market slowing down a bit and we are seeing prices leveling off. The first part of the previous statement is confirmed with the downward tick in Pending home sales. (see image below)
This year the investors aren’t out at the same numbers across the country. As prices are rising, interest rates are rising. So now we’re seeing a more normalized seasonal market. Here’s the trick. That is not to say that there isn’t an opportunity there. That’s not to say that we should just accept the fact that less houses are selling because I do believe there is a tremendous opportunity for the Seller’s who know how to price thier home and have a Realtor who knows how to market their home to maximize exposure.
Watching home asking prices gives us the first look at where home sales prices are headed. After rising rapidly in the first half of 2013, asking prices in two‐thirds of the largest metros are cooling. In fact, asking prices are falling, not just rising more slowly in 11 of the 100 largest metros…This is the most markets to see prices slip in six months. Prices are not going up. Asking prices are not going up the way they had been.
I think one of the challenges right now in our industry as we move forward, part of the reason home sales are slowing is people got carried away with the pricing. And if they get carried away with the pricing, they’re either holding the house off the market, therefore we can’t sell it, waiting for a better day, or if they have the house on the market, they’re not willing to price it that will actually attract a buyer to the house. Because again, they’re waiting for a better day.
Another reason why prices are leveling off is because inventory levels have been steadly rising. It’s simple supply and demand, if inventory is low and a lot of people want to buy, prices go up and vise-versa. Take a look at the slide below showing year-over-year inventory levels.
Pricing increases coming to a halt is not a bad thing. A slower pace is a positive for housing demand and will help to keep affordability from further eroding.
The quote below is from is from Moody’s Analytics. Moody’s is an economic firm that looks at housing through a microscope.
Sellers have to realize that keeping their house off the market from now to next spring is not going to make them more money; not substantially more money. Sellers should be thinking about the reasons they’re moving, those lifestyle decisions or those lifestyle changes that will come with the move. It’s not going to be enough extra money to delay that; the move they’re looking to make. If Sellers are moving up, prices are going to remain relatively stagnant, but we’ll talk a little bit later on about what might be happening to interest rates, and they have to think about taking that mortgage.
Next quote is from Zillows cheif economist Stan Humphries.
Last quote, Robert Shiller, and congratulations to him, he just won the Nobel Prize for Economics. This is what he said. “I define a bubble as a time when people have extravagant expectations and the expectations are driving home price increases. We don’t have the mindset of earlier this century,” meaning 2004, 2005, and 2006. “Affordability is still good compared to any time over the last 50 years.” So what are we talking about here? We’re not heading to a bubble. Prices are going to slow down because that’s what the market is demanding right now. We have to be ahead of that, take advantage of our knowledge and price accordingly.
Now let’s jump over to interest rates because there has not been the same amount of equity built up over the last ten years, many people even moving down need to take a mortgage out on that other house. So interest rates have become even more vitally important.
The government had a stimulus package. Part of that package is they were buying certain bonds to keep interest rates down. They’re thinking about, now that the economy is doing better, to start limiting that stimulus package. Once they do that, once they pull that money out, interest rates will creep back up again. The word that’s being used is taper.
Does the fact that they’re tapering affect interest rates? Let’s take a look. Here’s a graph that was put together a couple of weeks before the Fed announcement in September, and look what happened to interest rates?
Rates were skyrocketing just on the thought that the Fed might just turn around and lessen the stimulus package. Just on that thought, skyrockets started to accelerate. Throughout the summer they went up a full percentage point. Notice the movement a couple of weeks before, and the movement a couple of weeks after that meeting when they decided they weren’t going to do it yet, we saw that interest rates dove rather dramatically because everyone was relieved that they weren’t going to pull that stimulus. As we move forward, most people believe in the very near future, maybe December, that the Fed will decide let’s start tapering; pulling back because the economy is in good enough shape.
If the economy shows improvement between now and the first quarter, then we know that some of those votes to that were to the negative – let’s not do anything yet – will slide over to the positive.
What impact will that have on your buyers and sellers? Well the Mortgage Bankers Association believes rates will keep pushing upward going well above 5%. As a matter of fact, they’re not the only ones who believe that. Here is the list of the four major projectors of interest rates moving forward…all four of them believe that interest rates this time next year will be about a full percentage point higher than where they are now.
Currently interest rates are at 4.1% according to Freddie Mac. So we can see right here, especially if we averaged amount, were at about 5.2%; 5.1 ½% a year from now. They’re going to go up a full percentage point. What that means to a buyer’s purchasing power is that it is decreased by approximately 10%, meaning if you were approved at today’s rate for a home purchase at $500,000, interest rates going up 1% would now put your approval at $450,000…We’ve covered that topic in a resent blog here: How Does Rising Interst Rates Affect Affordability
In summary if you looking to buy now is the time, there is a little more inventory to choose from and if interest rates rise to where they are projected your home purchasing power will be cut by 10%.
If you are are Selling and making a move, if there’s a mortgage involved in the move, you shouldn’t wait…Property appreciation will not outway the cost of potenially rising interest rates. Sellers should be thinking about the reasons they’re moving, those lifestyle decisions or those lifestyle changes that will come with the move.