Nailed it! See how my predictions turned out

I’ll try to remain humble here, but I called exactly what is happening in the market today.

I have always said there will always be a market. There will always be demand. Some times the demand will be pent up with people sitting on the sidelines, but they are there, waiting to feel comfortable about making a move. (Typically these people wait until enough other people dive in and effectively end up jumping into a hot market, which is what they were hoping to avoid.)

I have been saying for months that I thought the market could still be very good with interest rates around 6% or less because historically, the past several super hot markets we have seen in our area had those rates and adjusted to average income, real estate values in our area are similar. I’ve said that rates over 7% won’t last forever. I’ve also been saying for years that once rates start going up again, people would be reluctant to give up their super low rates which would create a shortage of listings and would keep prices stable regardless of the market conditions.

I’ve suggested people buy real estate as soon as they are able regardless of the rate since you can always refinance when/if rates go down but you can’t go back in time to get yesterday’s home prices.

And now you know what stories are making the headlines? That mortgage applications are up recently due to rates dropping below 6%. That refinancing applications are up too. That rates are down. That prices aren’t really dropping in areas that didn’t see crazy stupid price increases.

I am seeing all this myself with my clients. I had two listings that went on the market right around Thanksgiving. One of them was modestly priced, totally updated and in a desirable neighborhood. I really thought it would go fast even though that time of year is usually slow. It hardly got any showings, which is very strange. Then once rates went down we had 5-6 showings in a matter of days and it sold. When I go to show listings to my buyers lately, most of the time there is another realtor showing the house when I arrive or one that shows up as I am leaving, sometimes both!

Time to resume your 2020 plans?

COVID sure changed the real estate market. Everybody knows that. For a while everybody was stuck at home and wanting home offices and separate rooms for things like exercising. Rates got so low that everybody decided to move up the property ladder. A lot of people realized life is short and went in a new direction.

I knew things would eventually stabilize and get back to normal.

The one thing I didn’t realize was that there were a lot of people who had plans for 2020 that were put on hold during COVID. Job searches, marriages, starting families…..and moving. These people are now feeling comfortable enough to resume the plans they had early in 2020. I’ve had several people reach out to me lately who are going to make some major changes in their lives this year.

I am sort of amazed that I didn’t see this coming. I guess like everybody I was so focused on all the changes due directly to COVID that I didn’t even think about those whose plans were interrupted.

Many other realtors I have talked to have said their pipelines are filling up for the year.

I think the 2023 real estate market may surprise us with how well it turns out.

Why 6-7% interest rates won’t crash our market

If you’re like me, all you are reading in the news is how the skyrocketing interest rates are affecting the real estate market. Headlines say stuff like how the rate has nearly doubled, how sales have decreased, some even are saying the market is going to crash.

Wrong. Wrong. Wrong.

Youtubers and journalists need something exciting to get your attention. If you saw a headline or video that pretty much said everything is going to be okay, would you be interested?

I think part of this drama is also that you have people whose data is correct but how they use it is wrong, or their data doesn’t give much of a historic comparison.

Affordability seems to be the main topic today. These people are talking about how much more a mortgage payment would be today compared to the all time low we saw last year……DUH! Short term thinking I say.

Here is why I don’t think a 6 or even 7% interest rate is going to do much more than curb unsustainable appreciation and slow down people moving just because they feel like moving. To begin with, people will always have changing needs for housing. Families will grow, there will be divorces, marriages, job transfers, job losses and all the other lifestlye/life cycle changes.

But here are the main reasons I am not worried: The Debt-to-Income ratio and longer term history.

Let me take you back to the early 2000s. The real estate market was crazy. Houses were selling fast in multiple offers. Prices were going up like crazy. Know what the interest rate was back then? Barely under 6%. And back in the late 90s when the market was also booming, it was about 7.5%.

A house in the Bluegrass that was worth about $250k back in 2004ish would be worth about $425k today. The principal and interest portion of your loan at 6% on a conventional loan with 5% down would have been $1423 back then and $2420 today. Yeah, that sounds like a lot more. It is, but let’s keep going here.

So the real difference between then and now with property taxes and insurance included would be about $1200 a month. To qualify for the mortgage on that $250k house back then would require an annual income of about $73k. Today that house would be worth about $425k and would need about $126k in income. The median household income has gone up 80% over that time according to the census. The value of that same house has not gone up quite as much.

So there you have it. I think if the market has historically been very good in the past during times when rates were higher than they are today, and since household income has pretty much grown congruent to home values in the Bluegrass, we will weather this period very well.

Then why is the market so slow right now? Simple. People are in shock and upset that rates went up so fast. Once they realize they can’t go back in time, they will move forward with their plans. I predict that (short of a major economic crisis that pulls down EVERYTHING) buyers will be out in force next spring. Prices will remain stable. It will be a good market. It won’t be a market that you’ll read headlines about because remember, you only see real estate in the headlines when things are exceptionally good or exceptionally bad.

How the market is changing

This is hard to believe, but I am busier with buyers than I have been all year. Buyers are out there shopping. Many listings I have shown have another showing taking place as I arrive or one coming in as soon as I am locking the door on my way out. There is a lot of activity. I think buyers are excited to have choices now. They seem excited to get to see so many houses. I showed 6 houses yesterday to one buyer. Six months ago I would shown a buyer one house. If they didn’t buy it, we would wait patiently until the next one came on the market.

Buyers seem to be pushing back a little on price. Only a few I have shown have gotten multiple offers. Also, out of maybe 14 or so houses I have shown in the past 3 days to 3 different buyers, only two of them have sold before I could show them to my clients. Six months ago, that number would have been much higher.

It’s going to be a weird rest of the year I think. It has changed so fast. We will have sellers who aren’t living in reality and think they get to call the shots. There will be realtors who also are stuck in the old market and not realize they need to hone their negotiating skills. There will be buyer’s who think it’s a Black Friday sale and want to offer 80% of the list price. This is when having a good realtor who knows what is going on in real time really helps!

What’s the rest of 2022 going to be like?

Not fun, that’s for sure.

After working in bad, good and in between markets over the past 17 years, we are entering a period where buyers and sellers are not going to be happy. Buyers won’t like that they missed out on the super low interest rates. Sellers won’t like that they missed out on the absolute hottest real estate market in all of history.

Here are some predictions:

  1. Pricing a house will become difficult. Typically you look back over the past 6 months of sales of similar houses to determine value. Well, we can’t really justify using comparable sales from when the market was so hot that about any house went for way over the list price and had 5-15 offers.
  2. Price reductions. Let me tell you something. A price reduction does not mean the market is bad. It just means the price wasn’t right from the get go. Sellers will be in denial and will want to keep pricing their houses as if buyer’s can still get a 3% interest rate. Trust me, having been in this business during the absolute work market ever, I can attest to the fact that when priced right, any house will sell quickly in any market.
  3. Home inspectors will have to start waking up and working again after practically being unemployed for the past two years.
  4. Realtors will have a whole lot more free time since the number of sales are slowing. This does not mean the market is bad. What determines a good or bad market is not the number of transactions but the balance between sellers in the market and buyers in the market. Just about everybody other than clickbait Youtubers agree that the market is cooling into a slight seller’s market. If there are 2 sellers out there and 2 buyers out there, that is a good, balanced market. Realtors are the only people that care about the number of transactions out there. Why? Because we get paid for transactions.

Want to know what I expect for 2023?

Assuming rates don’t go crazy and the general economy doesn’t collapse, I think when buyer’s emerge next spring they will have acclimated to inflation, acclimated to paying around 6% interest and they will resume buying houses.