The housing market sizzle has faded and we’ve entered a different season. We’ve basically said goodbye to the most aggressive housing market ever, and we’re in a new market now. Granted, the housing trend still feels elevated from normal, so it’s an error to call this market cold. Yet there is no mistaking a different temperature today compared to a few months ago.
10 THINGS ON MY MIND ABOUT TODAY’S MARKET
1) The pandemic rush looks to be subsiding:
There was a large spike in the size of homes being purchased over the past couple of years. We’ve seen more luxury properties sell (larger homes) and buyers at higher price points (larger homes) have been taking advantage of being able to work from home. Well, that looks to be moderating as we get back to a normal size. We still need a few months of data, so I’m a bit tentative in my announcement here. But for now, it looks like we’re starting to see more normalcy in size, which suggests the mad rush to the market has subsided.
2) The trend feels uneven:
Some properties are getting lots of offers and others aren’t, and some price ranges are more competitive. Most of all, we’re seeing buyers become more sensitive to price, location, and condition since affordability has taken such a beating lately. My sense is properties at lower price points are experiencing more competition (not a shocker), but homes at any price level that check all the boxes are tending to be ultra-competitive too. Sellers, it’s time to listen.
BREAKING NEWS: The housing supply streak is over. For 22 months in a row in the Sacramento region we’ve had less than one month of housing supply. We finally ticked up over one month.
3) Price drops are growing:
We’re starting to see more price reductions. We aren’t at an alarming level of reductions, but they are really growing. In fact, 33.1% of all active listings in the Sacramento region have had a price reduction, which means about 950 listings have a reduction right now. The following visual shows a breakdown of the dollar amount of reductions. For instance, 11.24% of properties with a price drop have reduced the price between $5,000 to $10,000. By the way, here’s a quick link from Altos to show a few years of price drops in Sacramento County.
4) Watch the forest and the trees:
5) Fewer offers being made:
We are still seeing a higher percentage of multiple offers compared to a normal market, but there are fewer offers happening from a few months back. Most agents tell me the number of offers has basically been chopped in half and then some from early 2022. This makes sense since purchase mortgage applications have dropped), which reminds us fewer buyers are shopping (big point). Here’s a poll I did on Instagram. This isn’t scientific, but the results would’ve looked much different a few months ago.
6) Becoming a unicorn buyer by accident:
I’ve heard a few examples where a buyer paid way over the asking price to secure a property, but there ended up being only one offer. One example I know about involved a buyer paying about $70,000 over asking price (and being the only offer). Thanks John for the convo about this last week.
7) Flattening pendings for May (but still down):
I put out this visual last month, and it shows a notable dip in the number of pending contracts in the region since April. Frankly, pendings have dipped in volume for over six weeks now, and preliminary stats for May show pending volume dipped by 14% from last year. Why is this happening? Because buyers are struggling to afford the market. There is no sugarcoating this reality. However, after a sharp dip in April, it looks like pendings flattened out in May (see black line). When some people saw the drop from March to April, the assumption was it would keep dropping at that pace. Well, that didn’t happen. What will this black line do in the future? I would expect for pendings to continue to be down from normal unless something interrupts the trend to create more affordability. Let’s keep watching.
Here is a look at Redfin research below too. Do you see the black line (2022)? There was a sharp decline for a couple of weeks, and over the past month the line flattened. One thing that has helped this line flatten (for now) is mortgage rates have been hovering around 5.5% instead of skyrocketing. The market feels very sensitive to rate changes, so I would expect to see rate changes affect the number of pendings from week-to-week (thanks Captain Obvious).
8) Increase of adjustable-rate mortgages:
We’ve seen more adjustable-rate mortgages happening lately. Is that good or bad? I’d love to hear your take. Basically, about 11% of recent loans nationally have adjustable rates. This is up from recent years, but way down from over 30% in 2005. Check out Mortgage News Daily to see how much lower adjustable rates are compared to fixed.
9) Quick change leads to quick change:
Mortgage rates changed quickly in recent months, and we are starting to see more change show up in the stats. I’d say the market hit an inflection point over a month ago where open house traffic dropped and the temperature was noticeably different. I suspect over the next few months we will see even more slowness hit the numbers. Basically, we should expect to see the sizzling market become even more tame since we’re seeing fewer pending contracts and an uptick of inventory. That is, unless something happens to interrupt the trend (mortgage rates unexpectedly dipping, for instance).
10) Sellers are having to negotiate with buyers:
Sellers have been in charge for so long, and generally they still have more power than buyers. But there’s no mistaking the market temperature has changed, so sellers have had to start listening and negotiating. While there are still some lopsided examples of paying over asking price, we’ve begun to see more credits given to buyers, more price reductions, and more negotiation for repairs. Finally.
A couple new memes I made this week. Anyone else watching Season 4 of Stranger Things? My family binged it, but I fell asleep, so I basically caught episode one and episode seven. Haha.
BONUS THOUGHTS:
Mental health and housing doomscrolling
Look, I want to say one thing in closing. Lots of people are obsessing about the housing market and even stressing over stats and trends. It’s easy to watch the housing market like it’s cryptocurrency – constantly changing by the minute. But we need time and objectivity to see the trend, and the housing market doesn’t change every time we log on to social media. My advice? Take your mental health seriously by finding ways to add peace into your life in the midst of a changing real estate landscape. I’m not saying to ignore any stats either (not at all). I’m just saying to keep stats in their proper context.
There is so much more we can talk about. Let me stop here for now. Stay tuned for a big market recap for May in about two weeks.
MARKET STATS: I’ll have lots of market stats out this week on my social channels, so watch Twitter, Instagram, LinkedIn, and Facebook.
Thanks for being here.
Questions: What are you seeing out there in the market? What number stands out to you the most? What did I miss?
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Hey, I agree with your point that we’re not in the ghost pepper fiery hot post pandemic market. Maybe we’re in the habanero pepper medium heat market with sweet peppers on the horizon.
I’m less concerned with adjustable rate mortgages now compared to 2008. Adjustable rate mortgages are bets that rates will be lower in the future and/or that the borrower will make more money in the future. As long as underwriting remains strong, I don’t see this as a huge negative.
Haha. I love a good word picture. A month ago I said it was Brad Pitt now vs Brad Pitt in the 90s. Whatever the word picture, the point is we are now in something else.
Thanks for your thoughts on ARMs. I’m not massively concerned, but I have to say I will be really concerned if we start to see the percentage shoot up. I think part of this depends on what fixed rates do. Rates over the past few weeks have gone down somewhat, so that helps.
You always bring something new and interesting to your stats. Happy to see that the surge in home size may be subsiding. Large homes are not sustainable for the market or the planet.
Thanks Gary. Yeah, it’s interesting to see home size moderate lately. I think it’s telling. It’s a real concern that builders are not able to build entry-level homes these days. While I understand it completely from a profit standpoint, it becomes a bigger issue for long-term affordability when we simply have larger and more expensive homes to buy and rent.
I learned my lesson with adjustable rate mortgages with my first loan. As soon as it was possible, up went the rates. I do not think there is anything inherently risky about them, but I prefer the security of a steady payment every month. My favorite is the 30year fixed loan that I pay off like it was a 15 year loan. If the economy gets bad and I have to cut back, I have a safety of margin already in place.
Lots of great info Ryan. Thank you!
Thanks Ray. I like your strategy on 30 vs 15 too. Smart move. I suppose it depends on how heavily the ARM loans adjust. I’d be curious to know more about that from loan officers, and to understand if there is any difference between 2005 ARM loans and today’s ARM loans. This is the key to risk. If it doesn’t adjust much, then no biggie. But if it adjusts to the point of people not being able to hang on, that’s no bueno.
Let’s hope one of your lender friends/followers adds some detail. 🙂
Hi Ray, please see my comments.
As an Appraiser, makes no difference.
As a Buyer’s Agent, Thank Goodness!
As a Seller’s Agent, Sorry you missed the window.
As a Investor, lucky to cash in on one.
Ha. Thanks Craig. I appreciate your cleverness.
Great info Ryan, you nailed it. From the lending side, rates have climbed about as much as our gas prices have. However, many of us in the Mortgage Business are thinking that things will ease up in the next several months. I bought my first home in 1980 or 81. Interest rates were 17.5% and I got them to buy it down to 14.5% that adjusted higher every year for 5 years. I later refinanced at 10% fixed. However I sold the home 9 years later and doubled my money. There is much talk about adjustable rate mortgages. They are not the problem that caused the 2008 meltdown. It was the Neg-Am or pay option ARM products given out to people with no qualifications. For example a waitress at Denny’s could claim that she made $12,000 per month and buy a $600,000 home with little to no money down and pay a payment that was less than interest only for 5 to 7 years while the balance owing climbed every month until it re-set. Then she would owe a lot more money, and have to pay back principle and interest on the remaining 25 or 23 years remaining and the payment would often double or more causing them to loose the home with no equity and more than double the payment that they had been making.
Currently to have an interest rate and payment that is fixed for 5 to 7 years then adjusts with certain rate caps in not a bad way to go. They are safe and give you plenty of time to refinance if rates do indeed fall again. And you are paying both principle and interest so your balance drops each month. Much confusion over this. Please let me know if you have any questions.
Thank you Rick. I appreciate it. I’m not on that side of things, so I’m definitely needing to learn more. So, how much could the rate potentially go up? Is there a ceiling? The part I don’t like here is on some level this is a gamble regarding the future of home prices. Or maybe it’s the market PTSD of hearing, “Hey Bro, just buy now and refinance later” from 2005. But regardless of the differences today, there is still an element where the buyer is betting on price appreciation, right? After all, rates could be lower in the future, but if prices decline, than it’s not always possible to refinance into a lower rate. Right? Please help me understand if I’m missing the mark here so I can change my thinking and/or narrative.
Hi Ryan,
Currently the 7 year adjustable is the most popular although they offer a 5 year and 10 year adjustable.
With the 7 year….the interest rate and monthly payment is fixed for 7 years. Then on the 7 year anniversary, the rate will adjust to the SOFAR index which today is at 1.7688 rounded up to the nearest 1/8% , plus the Margin which most are at 3% giving you a new rate of 4.875 and will then adjust in both rate and payments every 6 months with the same formula for the life of the loan. The most it could go up in a 6 month period is 1% but it could also go down. During the life of the loan there would be a maximum of a 5% increase over the life of the loan.
Some years ago I got a call from a man named Tony. He was in a panic. His loan was about to adjust the following month and he was at 6% and feared for the worst. When I looked at his paperwork and looked at the current index then, and I did the math, his new rate was going to drop to 3.75 and his payment go down significantly. Needless to say, he was thrilled.
The adjustable rate mortgage does not gamble on the future home values, it is a set rate protection for a set period of time, but, then is subject to a changing market. The bet is that fixed rates will at some point before the adjustment be lower or that they are only going to stay in the house for that period of time.
If home values decline, it should make no difference fixed or adjustable as both are paying down the principle balance every month, and it is unlikely that in 7 years the home will be worth less than what is owed. I hope that clarifies.
I really appreciate you. I guess the part where it seems like a gamble is to refinance into a fixed rate. That part could be affected if prices changed. I really appreciate your explanation. This gives me good food for thought.
A consumer or investor trying to decide the choice between ARM vs. Fixed benefits from a risk vs. reward analysis.
ARM start rates are almost always below fixed rates for the same credit profile and collateral. So we start out with a reward. The risk comes later. The question for the analysis then is to quantify that risk.
So first we calculate the benefit of the initial reward of the arm, which ha, ha, is a fixed amount of dollars saved in interest not paid in the initial period.
Then we need to look at best case scenario, worst case scenario, and all scenarios in between. quantify the scenarios, giving them positive and negative numbers and possibilities of achieving reality.
In practice, few people do this, fewer still do it rationally. Most people over weight either the worst case or best case scenario, and let that guide their decision.
Fortunately for me, I chose an ARM in 2005 on a $500K loan with a start rate of 5.xx. When it adjusted in 2010 it dropped in half and stayed under 3.5%, going as low as 2.125% until last month when it finally adjusted up to 3.75. Because we chose an arm, we payed about $180,000 less in interest over the life of the loan to date, than if we had taken a fixed rate. In about 6 months my rate will finally catch up to the 2005-2010 rate for the very first time since 2010. We can expect another rate hike in 12 months (maybe, maybe not). At that time the initial 18 year interest saving benefit will have to start paying back the risk finally coming to bear fruit. It would take the remaining 12 years of constant worse case scenario after worse case scenario to hoover up all my early years savings.
However, If I have put aside my savings, even if it had not been reinvested, I could then take my $180,000 in interest savings and pay off the remaining principal.
Basically, what we are often doing when we take a fixed rate over an adjustable rate is that we are paying gigantic interest rate fluctuation insurance to the banks in order to buy peace of mind.
Fascinating, Jim. I think I’ve been judgy regarding adjustable rates, but this gives me pause. I can see how they can work in some situations. I appreciate it.
Thank you Ryan for your insight. I just got a purchase assignment with a sale price $42,000 (10%) over asking. My first question will be, “How many offers did you get?”
Thanks Dan. It can certainly help paint a picture of value when there are multiple buyers willing to pay. I think that’s a solid question. I would also be asking that. Though the proof of value is found in the comps and data ultimately (as we know) – not the number of offers (even though I think the number of offers can be data to consider). I wonder if there are comps, listings, pendings, and data to support the contract price. Or is this just a lone ranger? (rhetorical question – thinking out loud). Good luck Dan. Thanks again for sharing.
Great market update, Ryan. I like your take on mental health. I won’t get off in the weeds on this but I do believe that we do have a mental health issue in the country that may be tied directly to social media and the constant bombardment of negative information. I’ve never heard for doomscrolling but it’s an interesting concept.
Thanks Tom. We do have a crisis on our hands. I suspect there are multiple causes. It’s been hard to watch some of the things happening in our society lately.