October revealed a very different housing market than what we’ve grown accustomed to seeing. After two years of turbulence and fierce competition for homes, national sales have declined and inventory has risen.
According to Nick Bailey, CEO of RE/MAX, it’s not a market slowdown – it’s the beginning of balance. Here’s what he had to say:
The first thing the RE/MAX October report touches on is that fewer homes are selling. Is that because of interest rate fluctuations or is something else going on?
Regardless of the macro environment, the numbers, inflation, rates and all of that, there’s something that happens every year – people buy and sell houses. It’s driven by life events. People get married, have children, divorce, move for family, jobs, etc. And I think that gets lost within the industry a lot, because I think most people look at the market from an investor angle versus a true ‘What drives homeownership?’ angle.
For over 90% of people, it’s really life events. And it’s more about ‘Which house do I need to fit my family, my lifestyle, my area? Can I afford that? Do I have a down payment, can I afford the monthly payment?’
The demand continues to be very high. And that’s driven a lot by the population growth of Millennials and Gen Z’s, Millennials being at the forefront of their home buying years, and Gen Z quickly approaching behind them. So, we have this pent-up demand, but we also have an estimated 4 million homes that we’re short in the US.
We’re going to see with the brakes of what we’re trying to do with inflation and the changing of rates, so things will bounce around a little bit – especially into the first half of 2023.
How does what’s happening right now play into what we’ve seen over the last few years?
This being a supply and demand business, anything compared to 2021 on a year-over-year basis is probably not a fair comparison because it was just such an anomaly of a year. If you remove, say, the last year and you look to pre-pandemic years of balancing of a market, that’s what we’re seeing.
We’re seeing a return to a more balanced market, where not just sellers are in the driver’s seat. But both sellers and buyers have the ability to negotiate, and not one or the other have an upper hand.
The last couple of years – where houses were on the market for hours or literally single digits of days, is not sustainable. Buyers didn’t have a choice on a home, so it was hurrying. ‘We have to grab this one, compete against 25 other people and pay above asking price…’ just isn’t sustainable.
What does this mean for buyers?
There are a couple of things that buyers today need to know. They need to know, one, that they’re going to have more choice on homes – that there’s going to be more on the market.
Two, that they’re going to have the ability to negotiate with sellers more than they have had in the last couple of years.
Three, they’re going to look at alternative mortgage products. Because the 30-year fixed was at such a record low, that’s all everyone focused on.
Here’s an example – you look at Adjustable Rate Mortgages, five one arm or seven one arm, those were more than 35% of the market pre pandemic. During the pandemic, they dropped to single digits, because the 30-year fixed was so low, but now they’re on the rebound.
We have a saying in our industry that you marry the house, but you date the rate. Some folks are getting into a home maybe at a higher interest rate than they thought they would be in from a year or two ago. But it will start building the refinance pipeline, that there are folks that have purchased in the 6-7% interest rate. And I think in 2023, especially the second half of 2023, we’ll start to see rates fall again as we have in the last few weeks. In fact, it’s fallen quite considerably.
You said the market is balancing itself out right now, do you expect it to stay that way for a long time? Or do you expect there to be more fluctuations similar to this year in 2023?
I think we’ll see some bouncing around. We’ll see rates go up a little bit, we’ll see them come down a little bit. If I look at the whole year of 2023 overall, I think we’ll end the year with rates lower than they are today.
But the biggest thing that we’re going to see a return to next year is real estate being more local.
What I mean by that comment is in a balanced market, the Midwest was your Steady Eddy with anywhere from 2-4% modest appreciation each year. And then you had your coastlines, which have always been more volatile, because they’ve been more desirable. You see your California to Texas and Florida, as well as areas in the Northeast – they generally have the highest degree of price appreciation. And then when the market starts to change, or transactions come down a little bit, those areas see the highest level of price correction or price decrease.
But in the last couple of years, it’s been very different. I was asked maybe a year ago, ‘what’s the hottest market right now?’ and I said, for the first time in my 30 years in this business, every market was hot.
When you’ve got Bozeman, Montana, and Boise, Idaho, leading the pack at 35-38% year-over-year price appreciation, that was just unheard of. That was the type of appreciation that you saw in San Francisco and New York, and San Diego and places like that. And that’s what we’re gonna see in 2023. We’re gonna go back to those high-density markets. We’re seeing people return to them.
Washington DC, New York, San Francisco, those areas have always been popular, but the pandemic drove people away from high-density. Now we’re seeing a return to those areas. And as we do, then we’ll see places like rural America and the Midwest go back to their more conservative, single-digit appreciation. And I don’t think that’s a bad thing. I think that you can’t have a market that goes up 20-30% year-over-year and expect that to be sustainable.
Is there any concern about housing supply as people shift back into those urban areas?
Overall, as I mentioned, we have a shortage of housing anyway. We are still living with the fact that after the Great Recession, new home construction has not caught up to where the market and the demands of the market are even over 10 years later.
There’s been more regulation, and we just can’t get new construction out of the ground fast enough. You couple that within the last couple of years with labor and supply issues, and that slowed it down even more.
I think we’ll also see labor and supply chains open up more than they were a year ago. It’s easing some of those restrictions on new construction, but I think we’re still years out from shoring up the gap in the overall shortage of housing.
