In the last week of May, home listings leapt 9% in a year-over-year comparison. Between mid April and mid May, new listings increased twice as fast as they did in the same timeframe last year. But pending home sales in April were down almost 4% from March and down just over 9% from April 2021. Clearly, we’re seeing a cooling in the market, and depending on what side of the real estate transaction you’re on, that may or may not be a good thing.
The Effect of Rising Interest Rates
One thing both buyers and sellers can agree on is the rising rates aren’t good for either side (unless you’re a cash buyer). Mortgage rates have increased 100% since the beginning of the year and the predictable fallout is a sharp drop in home sales, but not so much sales prices…yet. Here’s what that means in a real world example:
In May 2019, a $300,000 home purchased with 20% down on a 30-year fixed mortgage could expect an average interest rate of roughly 4.33%. Monthly payments would have been somewhere in the neighborhood of $1,192. In 2020, that house was 5% more expensive but interest rates were lower, around 3.41%, knocking about $70 off the mortgage payment. In 2021, monthly payments would have been up $100 or so from that $1,200 monthly payment. Fast forward to May 2022, home prices are up 21% AND mortgage rates averaged 5.5%, which meant a monthly payment that’s roughly $800 more than it was in 2019 on a small $240,000 loan.
Multiply that by your median home sales price – $595,000 in May according to the Reno/Sparks Association of Realtors and $1,575,000 for San Francisco, according to the SF Association of Realtor, May’s three-month moving average – and we’re talking some steep monthly payment increases.
Is it too Late to Sell?
Any sellers who were contemplating taking advantage of such a red-hot market are now wondering if there’s still time or whether it’s too late. For six straight months heading into April, pending home sales have declined. Even newly built homes were down 16% from March to April. Agents who were previously fielding 10 to 15 offers on listed homes are now seeing 2 to 6, and in some cases, none.
The answer to whether you should sell depends on the type of product and what you’re trying to accomplish with that sale. Condominiums and townhomes have gotten softer faster, as have any properties with an obvious blemish (lack of bedrooms, poor condition, farther commute), so if you’re selling one of those into this market you have to be in front of the news headlines and make sure you’re attractively priced.
Is it too Early to Buy?
Buyers are sensing the same shift and are in a wait-and-see mode. My counsel to them is keep your eyes peeled. If you see something that fits your needs, be prepared to act and take advantage of the increased negotiating room and maybe a well-timed break in the interest rates. But don’t assume you’ll see something better later for less. Like the stock market, it’s impossible to predict the absolute top or bottom of any market and trying to do so means you’ll be stuck in analysis paralysis and may miss your best opportunities.
My best guess (and all predictions are guesses at the end of the day) is the news media will continue to amplify the “sky is falling” narrative well into the summer, and some of the best buying opportunities we may see will be in fall and winter of 2022. But that’s assuming a home that meets your needs shows up, so waiting may not be to your advantage.
Ultimately, the dynamics of the housing pressures that caused the prices to skyrocket still hold true (low interest rates aside). We’ve been radically underbuilding to meet current demand for well over a decade and making up for that is not easily done given costs of building (labor, materials and infrastructure). Even if inflationary pressures pull back, those will continue to be high.
One other important thing to remember is the sensationalized numbers quoted by any news outlet are almost always what is known as lagging indicators, meaning they are citing what happened in the past versus what is going on now or into the future. To get that real-time data, find an excellent agent who will keep you informed. You know the good ones. And if you’re buying, don’t wait too long because I don’t personally expect the pullback to last much past the end of this year for the reasons I stated above. If you’re selling, forget what your neighbors’ place sold for two months ago and either roll the dice by waiting it out until next year or price your place accordingly to get in front of the sky-is-falling headlines that are sure to be coming.
Buying or selling in Reno, Lake Tahoe or San Francisco, Bay Area? You know where to find me!