Higher rates, insurance, & the stock market vs real estate

Rates have gone up, but have they sucked all the demand out of the market? Nope. Let’s talk about that today by looking at a few stats. Also, someone asked if the stock market is connected to the housing market, so l made a cool graph. I have a few thoughts on insurance in California too. I know, these are all dissertation topics, but scroll quickly or digest slowly.

UPCOMING (PUBLIC) SPEAKING GIGS:
8/29/23 Elk Grove Regional MLS Meeting
9/06/23 KW Roseville Big Market Update (link coming soon)
9/26/23 Orangevale MLS Meeting
9/28/23 Yuba City Big Market Update (in Yuba City (details TBD))
10/4/23 KW Sac Metro Big Market Update (register here)
10/6/23 SAR Think Like an Appraiser (TBD)
10/27/23 AI Fall Conference (San Francisco)

RATES HAVE BEEN GOING UP LATELY

Mortgage rates have gone up lately, but the market doesn’t feel altered like it did last year when rates doubled. I’m not sugarcoating. I’m just saying rates above 7% haven’t been the deathblow to demand over the past couple of months so far, but we could certainly see a huge change ahead if rates continue to tick up. I will say I’m hearing from loan officers that they’ve seen fewer purchase applications lately, so clearly 7% rates are having some effect that maybe hasn’t been entirely seen in the stats yet.

YES, TWO NEW MEMES

DOES THE STOCK MARKET DRIVE REAL ESTATE?

“Bro, the stock market has improved, and that drives real estate.” I’ve heard this a few times lately. Look, it’s possible the housing market in some areas of the country could be more driven by the stock market, but most buyers don’t derive their income from the stock market, so there isn’t a one-to-one correlation to real estate. Granted, this past upward price cycle since 2012 has looked pretty similar for both stocks and real estate, but when we back up a few decades, the trend clearly isn’t the same. The Sacramento market didn’t drop during the dot com bust around the year 2000, and Sacramento peaked years before the stock market did during the Great Financial Crisis (2007). Oh, and Sacramento dropped in the 90s while the stock market increased. And the local market saw explosive price growth beyond what stocks did from 2000 to 2005.

It’s possible a higher-end buyer could feel more confident about real estate if the stock market is doing well, but the stock market isn’t the ultimate driver for the bulk of the trend. Let’s remember what happens with the economy can affect housing and stocks, so there’s going to be some correlation.

EXPECT A SMALLER POOL OF BUYERS

If rates continue to rise, we should expect lower buyer demand. Duh, thanks Captain Obvious. Sellers, price it right, negotiate as needed, and realize buyers are sensitive about paying the right price. If you are a seller, my strong advice is to go to a mortgage calculator to see how much it costs to buy your house before you decide to flex too much on buyers. All that said, if rates rise more, it’s possible we could see sellers step back more too. Time will tell.

IF YOU WORK IN REAL ESTATE…

I recommend planning for low supply and low demand ahead. If something alters the trend, great. I like the idea of being realistic about the market that actually exists, and being surprised if something else occurs. In other words, plan for the worst, but bonus if something else happens.

NO MAJOR INCREASE OF LISTINGS DESPITE 7% RATES

Rates have been at or above 7% for a couple of months now, but we haven’t seen a major increase in the number of listings during this time in the Sacramento region (though El Dorado has seen more of an uptick compared to surrounding counties). Don’t get me wrong. We’ve definitely seen an increase in active listings compared to the spring, but that’s also normal for the time of year. This is something to keep watching by the week because it could change quickly if rates shoot up, but so far there hasn’t been an explosive uptick like last year, so the market doesn’t feel shell-shocked like it did in 2022. I will say weekly pending contracts have felt flat for the past couple of months, so that’s where 7% rates look to be having an effect (still not a dramatic change though). Check out some weekly metrics from Redfin data if you want.

STRONG MULTIPLE OFFERS STILL

Over the past ten days of pending contracts, 50% of pendings have had multiple offers in the region. This number is definitely lessening from the height of the spring season, but it’s also still elevated compared to a pre-2020 market. Of course, there aren’t many sales or listings today, but among the supply that’s out there, it’s competitive. That’s what the stats show.

IT’S STILL A TIGHT MARKET

Overall, it’s still a tight market. In a normal year we would see way more actives than pendings since it’s normal for buyers to have more selection. It’s not a shocker either to see lower prices with more pendings compared to actives. It’s more competitive at lower prices (normal trend). Again, I’m not sugarcoating here. I’m just saying we aren’t seeing a dramatic sharp change like we saw last year. Are buyers feeling the lack of affordability? Definitely. I’m hearing loan officers tell me they’re seeing fewer purchase mortgage applications, and I’ve heard of other buyers backing off the market. Yet, we just haven’t seen any massive shift in listings and pendings as of yet.

Here’s a look with sales over the past thirty days in yellow compared to actives and pendings. If we start to see volume (yellow) drop over time, we should see a change in the black bars going up (actives). Time will tell.

MONTHLY SUPPLY BY PRICE RANGE

Here’s a look at monthly supply by price range. This considers the number of active listings and sales over the past thirty days. Overall, these numbers are low because we basically have a market where low supply and low demand have met. By the way, it’s normal to see more supply at higher prices.

FIRE INSURANCE ISSUES IN CALIFORNIA

I’ve been asked quite a bit about insurance lately. Look, we’ve been seeing some local areas struggle with costly fire insurance for years, so this isn’t something new. For instance, I recently talked to a buyer shopping in Auburn with an expected monthly $750 monthly fire insurance rate. I’ve heard about payments over twice this amount also in El Dorado County and other areas. It just depends on the size and location of the property. But the bigger narrative lately is insurers are stepping out of California altogether, so the conversation isn’t just about fire insurance any longer. A local resident in a suburban area emailed me this morning to tell me that her insurance dropped her, and now she’s getting quotes at twice the amount of what she was paying. I’ve heard a few stories like this, so my market antennas are up. Ultimately, if this dynamic becomes more common, it can make housing more expensive even in non-fire areas. If buyers have to rely on ultra-expensive state insurance too instead of private insurance, that’s going to be problematic. For now, I don’t think we’ve reached a point like this for homeowner’s insurance, but we are starting to hear more stories, so let’s pay attention. 

WHAT DO APPRAISERS DO FOR COMPS IN FIRE AREAS?

Someone asked me if appraisers are doing anything differently in appraisals in areas where fire insurance is lofty right now. Ultimately, the comps are very likely subject to the same issue, so it’s a trend that feels baked into the market. In other words, if all the comps are experiencing the same issue, appraisers don’t have to think too much about insurance. However, if some local areas don’t have higher fire insurance, this is where appraisers (and real estate agents) need to be really careful about comp selection. After all, if one house has an extra $750 per month for fire insurance, but the comps don’t have this issue, that’s absolutely something we need to consider. It really goes back to valuation basics where we need to select comps that are subject to the same bigger forces at hand if possible. 

MORE RESEARCH AT SOME POINT

I’ll push out some research at some point to talk more about what’s happening with volume in fire insurance areas. One of the struggles is it’s not easy to isolate areas that are subject to higher insurance because not every portion of a ZIP code or city is always subject to higher rates. I will say, in general, during the pandemic buyers rushed outlying areas, and higher fire insurance wasn’t a big deal at the time. This was true in El Dorado County, but it’s not as easy to track in Placer County. Could this trend change ahead? Of course. When consumers struggle with affordability, that can change how people think about prices and even something like appealing property taxes (which is something people don’t think much about until a market is down). Anyway, let’s keep watching. And if you have a way to easily track fire insurance trends, I’m open ears.

I hope this was helpful. Thanks for being here.

Questions: What are you seeing out there in the market? What stands out to you above? I’d love to hear your take.

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