Things to remember in a slowing market

Yea, the market is slowing down. Everybody knows that. No big deal. That crazy roller coaster market couldn’t last forever and I’m sort of glad really. It will still be a good market for years to come, but it will seem like a let down compared to the last couple of years.

Here are some things to remember as you process the Doom and Gloom news cycle real estate is in at the moment.

  1. The “Average Days on Market” will be going up. Don’t be alarmed. Usually the way that works is that the worst houses that nobody wants stay on the market longer and bring down that average. Also, keep in mind that average is usually for all residential property types in all price ranges. If you have a $350k house, do you really care about what the market is like for a million dollar home? Or a townhouse at any price?
  2. The “Average Sale Price” is another one that can confuse people. An average is just that-it’s an average of all sales. If house sales over $500k slow down a lot, it will drag down the average sale price. This does NOT mean your house is worth less when you read silly headlines that say stuff like “The average sale price dropped by 2% last month.” When rates got super low, I saw more houses selling for $1,000,000 or more than I have ever seen. Now that rates are much higher, I totally expect to see sales at that price point slow way down, bringing down the average sale price.
  3. Values may stay flat after going crazy for the past two years, but prices will still go up. I know this sounds crazy, but hear me out. Let’s say you bought a house a year ago for $400k and we have had 8% inflation since then. Your house needs to sell for $432k today for you to have effectively broken even. That’s because it takes 432,000 of today’s deflated dollars to equal 400,000 of dollars a year ago. In other words, the price of your house has to be higher even if it got zero percent appreciation just because the value of the dollar has eroded. (This is a whole other post, but one reason prices have risen so much over the past year is because we saw massive appreciation and massive inflation. If prices went up 15% and inflation was 8% of that, then that means the real appreciation was 7%.)

I started my career just as the Great Recession began. I saw most houses in our area drop in value by 15-20%. I know to a lot of people, this market seems scary. Trust me, it isn’t. All that’s going to happen is that we have a more balanced market. It will be a good, but not the greatest time in history, to be a seller. It will also be good to be a buyer because you will be able to get a house that should be a stable investment for your future.

Don’t believe the Chicken Littles in the media

I love YouTubers. Always a good laugh. Always predicting the market is going to crash.

They get a little nugget of data, like that the number of people refinancing their mortgages has dropped and draw the craziest conclusions. Well, when rates were between 2 and 3%, everybody rushed out to refi. Even if the rates had not gone up, eventually everybody who would have refinanced would have done so. That statistic was bound to decrease on it’s own eventually.

My favorite ones are those that predict a major housing crisis. It is just not going to happen, especially in Lexington.

Why?

The number one reason is that Lexington is almost out of land. Lexington cannot grow any more. The surrounding communities will of course grow. Lexington will always be the most desirable town in the Bluegrass and prices will remain higher than anywhere else around us due to that. (FYI-we will see a whole lot more remodeling in the future than we see building in Lexington.)

What else do I see in the near future? A slowing market, mainly due to interest rates and nothing being for sale. Right now everybody is complaining that 5% interest rates are the worst thing to happen to the market. I disagree. While rates being low were nice, it is the low rates that spoiled all of us and are affecting the market right now. We currently act like rates in the 2-3% range were normal and 5% seems excessively high. However, I don’t see prices dropping though. That’s because all those sellers who refinanced their mortgages when rates were under 3% are not going to move until they have a need. We need sellers in the market. When sellers are scarce, that means more demand than supply. People will likely only move when they outgrow their home, lose a job, get transferred, their family grows, Grandma needs to move in, or a divorce. You’re not going to give up a 3% mortgage on a cheaper house to get a 5% mortgage on a more expensive house unless you really need to move.

So, in Lexington at least, we have little room to build more houses, sellers who are less likely to move just because they want a nicer home, and higher interest rates. All of which means less supply at a time when we have Gen Z trying to get their first home and millenials needing to move up.

I guess if I had a YouTube channel, it would be pretty boring because you don’t get much attention by saying prices will remain at least stable and the market will stay slightly tipped in the seller’s favor.

Are we in 2005? Yes and No

17 years. That’s how long I’ve been in real estate. Man, have I seen a lot!

When I got into this in the spring of 2005, here is what it was like:

  1. No realtor wanted to work with buyers.

2. It took no real skill to list a house and sell it since they were selling so fast.

3. We all thought the market would be like this forever.

4. Affordability was an issue and people were considering moving outside of Lexington to find cheaper housing……until gas shot up to $3 a gallon.

Here we are in 2022 and all that is still the same at the moment:

  1. No realtor wants to work with buyers now since all you do is write offer after offer on every new listing in any buyer’s price range.
  2. It takes even less skill to list and sell a house today since you don’t even need to know what the house is worth. Today you could list the house at 9:AM for $1 and by 5:PM the same day you’ve got 5 offers all at market value. The moment being a realtor gets a little tough, you will see 25% of all realtors get out of the business……starting with the ones who suck at being a realtor but are brilliant at self promotion.
  3. We still think it will stay this way forever. It won’t. While I think the market will stay strong short of a major economic catastrophe, it will slow down. Houses still sold in the late 70s and early 80s when interest rates were the highest they have ever been. Don’t think for a minute that 5% or even 7% will kill the market. Don’t think that inflation will kill it either. Wages will rise. They have in every inflationary time. Right now they haven’t caught up to inflation but they will. If you made $1600 a month in the 80s and your mortgage was $400, that is the same percentage as if you make $6400 a month now and have a mortgage of $1600.
  4. Affordability is still an issue. Used to be finding a first home under $100k was hard. Now it is hard to find anything decent for less than $200k. Many people that work in Lexington have been shopping in surrounding towns for cheaper prices. I have always discouraged that for a couple of reasons. I did the same in the late 90s with my first house. I was driving back and forth between Lexington and Winchester all the time and hated it. What I saved on the mortgage I spent on gas, tires and maintenance for my car. I encourage people to live where their life is. If work and your social life are in Lexington, well, you should live in Lexington. Also, I remembered what gas hitting $3 a gallon did to the market back then. It killed the first time buyers interest in buying outside of Lexington. Now $5 a gallon seems to be the magic price that keep people from doing this.

Appraised value verses Market value

Seems no matter what the market is, I’m explaining the difference between Appraised Value and Market Value.

Many people think whatever the appraiser says their house is worth, is what it is worth. The real value is whatever number a seller and a ready, willing and able buyer agree upon. Appraisers study past buyer/seller behavior and give an opinion of current value.

When the market was bad, I was always explaining how appraised value was usually MORE than market value. It was more like the house’s potential. In this crazy seller’s market, I am sometimes explaining how appraised value is LESS than the market value. A lot of the reason is because market value happens in real time. It is right now. Appraised value is saying what the value should be based on the past.

Just this week, a house I sold for $429k appraised for $417k. As I read over the appraisal report, it became clear to me why it did not appraise for the full sale price. Two of the three comparable sales were 6 months old. In an appreciating market, you must make a value adjustment for this. The appraiser gave the two houses 2 and 2.4% appreciation. We have seen much more appreciation in values than that since last October.

In response, I was able to obtain two other offers the listing realtor got. One was $421k and the other was $427,500. If you average those two offers plus the winning offer of $429k made by my buyer, that is an average of $425k.

The appraiser refused to adjust his opinion of value. This is how appraised value and market value differ. Market value is the 3 ready, willing and able buyers who desperately wanted to purchase this home all agreeing the value is between $421k and $429k. Appraised value, in the case of this home, is some stubborn dude with a big ego who isn’t actually in the market to buy anything cutting and pasting a lot of numbers on a sheet of paper and charging $425 for his outdated opinion.

What would it take to crash the real estate market?

A lot of people subscribe to the “What goes up must come down” theory on markets. I don’t. I tend to just use that one when describing gravity.

For real estate, we have only really ever had prices go down twice in the history of tracking such stuff. Once was the Depression which caused ALL markets to go down, and the other was the Great Recession which was largely caused by bad mortgages that were toxic to the stock market. Neither time actually had anything to do with just the real estate market.

Today’s market is probably the healthiest it’s been in a long time. Prices are high due to supply and demand. Sure, low interest rates help but not as much as you would think. People acclimate to interest rates. I remember bragging about getting 6.625% on my first home when all my homeowning friends were over 7%.

When people on Youtube or those who write for the news look at the real estate market, they tend to not look at the whole picture. I am sure you have seen headlines about how all the people in mortgage forbearance would crash the market once they got foreclosed. Didn’t happen. All those people who needed to sell had enough equity to sell and avoid foreclosure. What about all the Baby Boomers who would leave a huge void in the real estate market as they sold their homes and went into retirement homes or to reside on the other side of the Pearly Gates? No mention of the youngest generation of buyers entering the market who would keep the wheels of the whole market greased so everybody can move. Years ago I described this like a baseball game where the bases are loaded. The Player on 1st base wants to run to 2nd. The Player on 2nd base wants to run to 3rd. The Player on 3rd wants to run home. What needs to happen in order to keep all those Players moving? For the Batter to hit a home run. The first time buyers are the most crucial element of the market. Without them, no homeowner can part with their old house in order to move up to their next one.

Everybody knows how Supply and Demand works, right? Let’s apply it to real estate. Most people involved in selling or buying will be doing both. Most sellers are also buying. Most buyers are also selling. That means there is no net gain or loss in the supply/demand ratio regardless of the market. This is why the supply/demand ratio got so bad during the Great Recession-You had so many foreclosures where the previous owner did not reenter the market as a buyer. Other than in such catastrophic times, the only people who are doing one side of a sale are first time buyers or those who have passed away or are going into some form of assisted living. Historically there have been more first time buyers than there are those who are exiting the market permanently. (I am excluding those well off enough to purchase second homes since that is a smaller market and we are not in a big area for that like Florida or any other vacation destination.)

So then, what would it take to tank the real estate market if it has nothing to do with real estate? It would take something terrible to happen with the economy…..meaning something bigger and broader than just the real estate market that is like a Tsunami and wipes out everything in it’s path. Let’s hope that doesn’t happen any time soon!