The housing market is really starting to feel the pain of higher mortgage rates. Today I’d like to unpack some fresh October stats to show what I mean. I also have some thoughts about the spring season when prices are dropping. Whether you’re local or not, I hope this is helpful.
This post is designed to skim quickly or digest slowly.
UPCOMING (PUBLIC) SPEAKING GIGS:
11/4/22 Market update in Roseville (on Zoom now)
11/15/22 Sacramento Bee Q&A at 12pm (RSVP here)
11/17/22 Fair Housing Lunch & Learn (RSVP here)
12/5/22 SAFE Credit Union market update on Zoom (register here (free))
1/18/23 WCR Market Update in Cameron Park (details TBD)
1/19/23 Big market update at SAR on Zoom (details TBD)
1/23/23 Residential RoundUP (register here (free))
A 40% DROP IN VOLUME IS A SYMPTOM OF STRUGGLE
We’re seeing lots of markets around the country with dropping sales volume, which is the byproduct of a quick change in affordability due to rate increases. In Sacramento, volume took a beating last month. We still need another week before solidifying numbers, but we’re going to be down about 40% or so from last year. Keep in mind most sales in October got into contract in September when rates were at 6%, so being down 40% doesn’t even reflect 7% rates yet.
NOVEMBER VOLUME WILL LIKELY BE WORSE
In October, pending contract volume locally has been down between 40% to 50% depending on the week according to Redfin and Trendgraphix. This means November closed sales volume will presumably take a bigger hit than October, which underscores rates at seven percent are taking more demand out of the market (thanks Captain Obvious).
NOT ABOUT DOOM
By the way, I’m not writing as a doom and gloom guy. This is all about perspective formed by stats. It might not be easy for some to hear, but I’m only interested in talking about the market that actually exists. I have zero interest in promoting a rosy narrative too.
NOT EASY FOR SELLERS TO ADJUST
Prices have changed so quickly that it’s been tough for sellers to adapt. I’ve had a few conversations lately with sellers feeling remorse for not accepting an offer in the spring or early summer. One seller now has an offer about $60,000 lower than an offer made a few months back. That’s not easy to swallow, but it’s the reality upon us. I’m not saying prices are down exactly $60,000 everywhere either, but there has been a notable drop (more on that soon).
PRICES FLIRTING WITH LAST YEAR
As I talked about a few weeks ago, it looks like the median is about to dip below last year. So far in Sacramento County the preliminary median price for October is $1,000 below last year at the same time. It’s honestly too early to pull the monthly median, so I’ll share a solidified version next week. We’ll see how the numbers change between now and next week.
By the way, here’s a thread with weekly price graphs (instead of monthly).
WHAT HAPPENS IN THE SPRING DURING A DECLINING MARKET?
Okay, now some quick thoughts about the spring when home prices are declining. I think lots of people are wondering what is ahead as 2023 begins. In short, not every spring market is the same, but when looking at declining years in the 1990s and 2000s, there are many years where prices ticked up for a bit or looked more level during the spring.
Seasonality doesn’t always disappear: The darker bars show the median price from January to June, and in 2006, 2007, and 2008 there was a flat to slightly up vibe for a few months before declines persisted after the early spring. Of course, this could be due to larger homes selling in the spring, but even if that’s the case, it shows price seasonality isn’t always dead during declining years. We’ll see what happens in 2023. It’s hard to predict this year because we’re in a unique situation with quick rate changes.
The 1990s: The spring price trend is a bit more hit and miss in the 90s as sometimes prices clearly declined during the spring (black bars), but in other cases like 1994 there was a much more pronounced seasonal uptick.
DON’T GET STUCK ON PRICES
I think the visuals above are interesting, but they’re not the end-all graphs because they only discuss the price trend. Like I always say, don’t get stuck on prices alone because sales volume sometimes tells a more compelling story. I guess it’s ironic that I’m only showing prices here, but that’s what I had time for today. I do have some volume images to push out soon, and those will give even more insight into seasonality during declining years.
Thanks for being here.
MARKET STATS: I’ll have lots of market stats out this week on my social channels, so watch Twitter, Instagram, LinkedIn, and Facebook.
Questions: How are rates at 7% affecting buyers right now? What stands out to you about my stats above? What did I miss? I’d love to hear your take.
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Affordability will need to be brought back to the market via price reductions and/or rate drops. Given the fact that inflation is still an issue, I don’t see much relief for rates anytime soon which means more pain for home prices. And now we’re talking about recession end of 2023/beginning of 2024 instead of Q4 2022 or Q1 2023. Typically rates drop once infaltion hits so the higher rate environment 7%-9%, in my opinion, is here to stay for another 12+ months. It will be interesting to see what happens to all the potential sellers in their sub 3% rates. Will sellers choose to not sell and hold their breath until stability is brought back to the market restricting inventory? I think whatever is going to be the path and outcome, it’s not going to be anything subtle similar to all events since start of covid.
Thanks Paul. These are interesting times. That’s for sure. I agree with you about increasing affordability through price declines or rate declines. Rate declines seem like a temporary solution. We’ll see what the future holds. Subtle hasn’t been the operative word so far.
Yes to all of this! As the buyer, I am sitting on the sidelines wondering what sellers are going to do. The monthly costs at 7% are just unmanageable and frankly scary since we’ve been in so much interest rate turmoil the last year. Hopefully we don’t have to wait until next summer for sellers to adjust.. otherwise we’re going to see houses on the market for 3+ months.
Thank you Kayla. Yeah, it’s no joke what 7% has done to the monthly payment. This is where sellers who flex paying 7-10%+ in the past are simply talking about something different. 7% at historically high prices is a different ballgame. Hang in there. And please keep sharing your perspective. I really appreciate hearing what you are seeing and thinking from the trenches.
I agree with everything your saying. My main concern with the interest rates is that interest rates are not the only cause of inflation. Supply chain issues (China is where a lot of stuff sold in the US is produced and they are still doing lockdowns) and increased government spending (look up Venezuela – they had inflation around 1,000% – no typo) are other factors that are not being addressed. The other factor that increases the cost of all goods and services is increased oil prices. Yet it seems like the current focus is only on interest rates to control inflation.
Thanks for your take Rob. A good reminder to consider multiple factors.
So, it looks like the method of reducing inflation and making homes more affordable by putting RE agents, appraisers, title and escrow folks, termite guys and such out of business is working and, well you know the rest !!
It’s tough out there. People are really feeling it.
It will be interesting to see what happens in the spring.
Indeed. For now we’re poised to begin the year with diminished demand. I’m anxious to see the outcome of the Fed meeting today too. Hope you are well Gary.
Regarding prices flirting with last year… Spot on Ryan!
I sold a house last October for $570k. Fast forward one year and the house right next door – same exact floor plan with much nicer flooring, counters, etc. has been listed for about 80 days (I am not the listing agent ?). They tried asking for over 600k but then lowered it a few times. The just dropped it to $569k… still active. We will see…
Thanks for sharing Andy. Yeah, a sharp price change has been much more noticeable on graphs and in neighborhoods too when pulling comps. Please keep me posted with what you are seeing out there. I think at first buyers were managing a rate uptick, but 6-7% has been tough. And that’s exactly what we’re seeing in the stats.
One way to help buyers is to refer them to a lender or mortgage broker who can suggest ways to overcome the high interest rates, like a 12-year mortgage, even a 40-year mortgage, down payment and closing cost assistance, and advise that re-financing may be possible in a couple of years.
Typo correction: should be a 15-year mortgage.
Thank you Flavia. I think you are spot on that buyers need to research ways to get the rate down. I see lots of loan officers advertising a 2-1 buydown. I wonder if we’ll see new products evolve to help address affordability.
“advise that re-financing may be possible in a couple of years” sounds like a good foundation for a house of cards.
Thanks Ron. I hear you. I’m not a fan of that narrative, though I do think it’s okay to talk about the possibility of lower rates in the future. However, there’s a big asterisk next to that. Ultimately, we have to concede that nobody knows the future, and we don’t know how long rates are going to be higher or even how high they will go. In short, promising the opportunity to refinance seems really off. Buyers ought to be comfortable with their mortgage payments today and not bank on the future.
Good insight, thanks Ryan. We’re seeing early stage buyer demand continuing to slow as buyers are attempting to understand how the rate and market slowdown impacts them, more than what we would see in normal seasonality. Today buyers have fear of declining values and what they can afford based on rates. Buyer education on the market is crucial to their success. One silver lining is that the Sacramento region is still a primary destination for Bay Area buyers who are feeling even more of a pinch – values are down but they are also impacted by higher jumbo rates. If we can stabilize inflation in 2023 or do dip into a govt recognized recession we may see slight rate pull backs that could open an opportunity for buyers, but we’ll see. Appreciate your insight.
Thank you Jeff. I think we all look forward to inflation getting under control. What a mess we’re in right now. I feel for people building up credit card debt too. That’s going to be challenging with rates like this.
Sellers are slow to adapt to decreasing markets. Buyers are slow to adapt to increasing markets. It’s psychology, like a 5-year old saying “I don’t want to”.
Thanks Jay. Agreed. It’s funny how that works. And if we’re seeing really pronounced change, it makes it all the more glaring to be out of sync with the market trend.
Man, crazy how 2022 volume looks very similar to 2007 ?. Not saying this will be like 07 but that graph makes ya think. Thanks again Ryan,
Yep, that’s the trend. It makes sense to see volume doing what it is doing right now because of such a sharp change in rates (affordability). I think it brings back a bit of PTSD for those who lived and worked through the turmoil of 2007 too. I think it’s sobering when we look at a 20-year view like this.
A lot of the focus is on interest rates and affordability. While prices and sales are tracked here as appraisers should, not much is covered about the effect lower values have on owners who can easily slip underwater. We won’t see a rerun of the ’07-’08 days but for the many who got caught up in the “get in while the rates are low” did they consider that their payments may be wonderfully low but the asset they own is worth less than when they bought it. There is going to be an uptick in foreclosures and defaults that will factor into appraisals over the coming months/years.
Thanks Don. I agree. We should see more distressed inventory ahead. We are basically at the very bottom, so there is only room to increase. There is definitely pressure to avoid foreclosure though – especially in California. For now lots of people are rejoicing in their equity or low payment, but the sentiment could change if equity disappears and/or economic pain is felt.
Thanks for your insight, Ryan. I am thankful to be at the end of a 35-year appraisal career, because my business is slower than it has ever been. As an anecdote, my sister and I recently listed our 2br childhood home and, since it was cute, got 3 full-price offers. We countered and accepted the best one. They then canceled. We then accepted the 2nd best, which canceled after a week in escrow due to the interest rates. Hoping to still sell before having to chase the price downward.
Thanks for sharing Dan. That’s so tough. I really hope you find a buyer soon for the property. And I hope you get to tuck in your appraisal career and sit on the sidelines if you can. Hang in there.