Navigating the Shift

Change, while natural to economic cycles, prompts significant unease among buyers, sellers, and the agents who represent them. As real estate professionals, it’s our responsibility to combat extreme uncertainties that are often driven by a lack of consumer education.

Having knowledge of what’s going on in the market – and why – allows you to be a better fiduciary to your clients during changing economic cycles.

BIG PICTURE: CHALLENGING AFFORDABILITY

As of October 2022, the consumer price index has increased 7.7% year over year. Despite this falling above economists’ expectations and being the lowest inflation reading since January, Federal Reserve Chair Jerome Powell said they still have “some ways to go.”

During the pandemic, the Federal Reserve kept interest rates near zero in hopes of minimizing damage to the economy. However, inflation persisted thanks to a variety of issues both global and local that constrained the supply chain despite stable consumer demand. We know inflation’s a major issue when we see prices rise across a variety of industries while our spending power decreases.

In an effort to curb inflation earlier this year, the Fed approved its first rate hike since December 2018. Since March, we’ve seen six consecutive rate increases, four of which have jumped by 75 basis points. Today, borrowing costs across all sectors are at their highest rates since 2008. With the current economic headwinds expected to persist into 2023, rising rates will have a lingering effect on the economy overall.

INFLATION’S IMPACT ON MORTGAGES

Mortgage rates have risen from their lows of 2.65% in January 2021, and the latest estimates reported by Forbes from the Mortgage Bankers Association show the 30-year fixed mortgage rate to end 2022 at 5.4%. Between the high cost of borrowing and (still) elevated price points caused by low housing inventory stemming from the pandemic, the average homebuyer today is facing a significant decrease in affordability.

Prices are now inevitably dropping due to lower buyer demand. This year, the Case-Schiller Home Price Index saw its largest month-over-month dip since 2012. Still, not every U.S. region is currently facing the same degree of fluctuation. Prices are somewhat stable in the Midwest and Southeast, and on the West Coast, where asking prices soared to new highs during the pandemic, tumbling sales prices are more pronounced. The higher the climb, the farther the fall.

REMEMBER: THIS ISN’T 2008

There are two key issues that separate today’s market from the Great Recession that began in 2008: low housing supply and low foreclosure risk. Housing inventory remains near historically low levels — at the end of October, total housing inventory registered at 1.22 million units, down 0.8% from both September and one year ago, according to a report from the National Association of Realtors® published in November 2022. This lower supply helps offset waning demand due to mortgage interest affordability concerns.

Further separating the conditions of 2022 from the market shift of 2008 is the low risk of foreclosure in 2022. Many homeowners have built up significant home equity as prices soared during the pandemic, and borrowers face far stricter loan requirements today. Home values would need to fall significantly for a notable share of 2021-originated mortgages to fall underwater, or owing more on a home than its current market value.

Preparing For The Shift

Top real estate agents and team leaders need to be prepared for a shifting market with fewer transactions and cooling home prices. In 2023, sellers will be incentivized to hold on to their lower mortgage rates, and potential buyers may be more inclined to wait for rates to drop. With fewer transactions to be had, you need to dial up your lead generation activities significantly. Agent productivity will be a critical metric to watch.

As agents, we must position ourselves as housing market experts and consultants by prioritizing learning. More than half of Americans invest in the stock market, and in the U.S., the no. 1 avenue to building long-term wealth is through real estate. With so many eyes on the economy right now, particularly among investment-focused clients, education and service will be critical to maintaining trusted relationships. In addition to cultivating a deep understanding of the national and local markets, continue working closely with a trusted mortgage partner to provide buyers a multitude of financing options.

What your clients

need to know: The

market has slowed, but sellers should know home prices are still up dramatically year-over-year. Although each situation is unique, many homeowners have received enough passive equity over the past few years to make a transaction worthwhile despite dwindling buyer demand.

Days on Market (DOM) has increased in nearly half of the largest metro areas since last year, yet remains at record lows compared to pre-pandemic years. Median home prices are no longer rising at record rates but are leveling off instead. And, although price reductions seem more common now compared to a year ago, they are more in line with pre-pandemic levels.

Gone are the days of listing a home and receiving multiple, over-asking offers before the photos even had a chance to populate on the MLS. But, that was never sustainable. Expect to adjust your strategies when advising buyers and sellers in the new market and keep in mind that the changes we are currently seeing, while unnerving in the short term, will move us toward a more balanced and healthy real estate market in the long term.

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