Facebook
X
Pinterest
Copy Link
After an unanticipated, wildly hot market due to covid stimulus and near zero interest rates, pricing increased by 50-100%. Flash forward to today with high rates, high prices and our crazy train might have finally run out of steam. Here’s how to compose what this picture looks like now.
First, this doesn’t mean the market is going to come crashing down. I think it’s easy to refer back to the most recent painful event expecting a repeat. However, this time is different. We have strict lending conditions and most buyers are only empowered to purchase what they can afford. Second, unemployment is still very low such that most Americans can still afford to pay their bills.
The issue with our market now is affordability. My favorite way to look at this is calculating the average price of a home and the monthly mortgage payment assuming the buyer is putting 20% down. In this case of 2019, the average price for a single family home in Newport Beach was about $2,900,000. Interest rates at that time hovered just below 4%. That made the monthly payment just under $11,000/month. Flash forward to today. the average home is valued at $4,450,000 with rates at about 7.4%. That would bring us to a monthly payment of almost $25,000/month. The takeaway: although your home might be worth 50% more, it will cost your buyer nearly 2.5 times your carrying cost to purchase the home. Although wage growth is up, hard to deny that homes are not only up in terms of prices, the month over month carrying cost in conjunction with higher prices is the real nail in the coffin.
If we’ve experienced such a jump in less than 5 years, why aren’t we following Darwin’s theory of what goes up, must come down? Inventory. Naturally poor affordability would reduce demand and either sustain or reduce prices. However, many owners have low interest rates and are unwilling/can’t afford these higher prices and are locked in place: golden handcuffs. This tells us that there are likely a number of sellers who would like to move, but choose not to because of their financial circumstances. As a result, they are not listing their homes and we have less inventory. Right now, we have nearly half the volume of inventory that we did this same time in 2019. Normally half the volume of inventory would send pricing skyrocketing, but these high interest rates have killed demand. These two variables have been moving in conjunction with one another, propping up prices. But like I said, the winds might be changing.
The story is the same: demand is waning. However, we might finally have inventory building and days on market for existing inventory lasting significantly longer than it has. All of this being said, this varies by price point. First time home buyers are still competing and encountering some real struggles to get into the market. However, above 5 million and the market is fairly soft. It’s one thing to change your vacation plans for the year from 4 to 2 trips to accommodate your additional housing costs. Coming up with an additional $15,000 every month doesn’t equate to cutting your vacations in half.
Sellers, there are still buyers who have had lifestyle changes and need to make housing changes. Buyers, depending on your product search and market, you might actually be able to negotiate in contrast to submitting a “bid” for a home. We are finally beginning to approach a more “fair” market where negotiations can happen. For those who have been waiting for the real estate narrative to change, it’s here. For those waiting for a crash, we still don’t see it coming without a massive increase in inventory and or many Americans losing employment and unable to cover their expenses. Even still, the fed could always cut rates very quickly enabling home buying and employment again. This is the most classic, not so classic market that is following economic rules.
