Buyers Return To Negotiating Table
Q4 2022 was one of the worst quarters since 2008 but there are signs that was the bottom.
With unified resolve home buyers seemed to go on strike at the end of 2022. Tired of rising interest rates, irrational bidding wars, and economic uncertainty, they marched off the real estate playing field, confident in their belief that sellers would capitulate and the market would fall, and determined to hold out for their castle in the sky - for the price of a shoebox.
That buyers and sellers came to this impasse is no surprise; many first-time home buyers were priced down or out of the market as interest rates rose from historic lows in January, peaking in October at 20-year highs of over 7%. Their hopes that seller tyranny was at an end were buoyed by daily headlines heralding impending doom for the housing market. Then, as quickly as it started, rates reversed course, dropping by almost a full percentage point over the remainder of the 4th quarter.
But even as rates began to drop the buyer collective held its ground and home sales went into a deep freeze. In fact, in Q4 2022 we saw the lowest sales in five years, roughly equal to early 2020 when the pandemic shut down the market entirely. Buyers seemed determined to bring the market to its knees and drive housing prices down to more acceptable levels.
At first, it appeared to be working. Across the core Peninsula/Silicon Valley market area, median prices did, in fact, drop over 18% compared to their peak just a few months earlier. Similar price trends were seen across most Bay Area markets.
Alas, as is the fate with most economic cartels; individual interests and market realities began to break down buyers’ collective resolve. The new year has seen a rapid, if not a complete return to pandemic-era market dynamics.
Springtime In January
An almost universal constant is that people need, and want a home of their own. That desire can be suppressed for practical reasons - affordability or down payment accumulation for example - or for strategic reasons such as the belief that housing prices will drop substantially. In other words, trying to time the market.
I have never seen market timing work well for buyers or sellers. I’ve seen tons of good luck, and a fair bit of bad, (and have experienced both myself) but have never met anyone who can reliably predict market swings. Despite real estate being a fairly illiquid asset the market can move quickly, and its inherent illiquidity makes it even harder to predict.
But I digress. What of our intrepid buyer walk-out? As I said, the desire for a home didn’t go away, and that desire seems to have been released early this year, aided by an economy that appears for the moment to be heading for the proverbial soft landing. (I know, this is hugely debatable but consumer sentiment in the US tends to have a very short-term outlook. So let’s go with this for now.)
Mortgage rates have stabilized, down from recent highs. Inflation, while still high, is trending down and the Fed is signaling a slowing of its tightening policies.** And despite the news of layoffs, employment levels continue to be historically high and many of the laid-off tech workers are finding new work relatively quickly. All this is supporting a resurgence of home buyer confidence.
Pending sales have been rising rapidly since the beginning of the year.
(**A client recently reminded me of the Fed's powerful but less well-known rate control tool: quantitative tightening. Mortgage rates could really pop if the Fed starts pulling harder on that lever.)
Starting around the second week in January open houses that had recently been virtual ghost towns were suddenly packed again. In a 2-hour period, it is common to see anywhere from 20 to 100 groups come through. Inventory remains stubbornly low, meaning competition has returned for the few homes available to buy.
Homes are once again selling quickly and with multiple bidders. In the past few weeks, the majority of sales have had at least 2-3 offers. There were two sales in my office this week that pulled in 16 and 20 offers respectively! Overbidding is not uncommon either, though not to the extent we saw last year. And the Spring market is only just beginning.
Inventory is beginning to trickle into the market and will certainly go up over the next few months, though I predict (yep, I’m predicting!) that demand will continue to outstrip our local supply. Sellers with 2.5%-3.5% mortgage rates are hesitant to trade their current homes for the now 6%+/- market rates. Unless they have to sell, that is inventory we won’t see on the market.
But there are headwinds and the lack of market rationality that dominated 2021 and the first half of 2022 is not likely to return. Well-prepped and positioned homes that are priced right will attract a lot of buyer attention. Homes that don’t show well or are overpriced will sit on the market.
There is still a lot of economic and political uncertainty in our world that could quickly slow the market. Inflation could return to its upward trend causing the Fed to clamp down even harder on the economy. A reversal in employment levels, political instability at home or abroad, or a strong down leg in the equities market; any of these could bring an increase in mortgage rates and crush consumer confidence.
So, how should you time the market? You don’t. Real estate is a long game, and it’s your home. If the time is right for you personally to buy and you can afford it, buy your home. No one can predict how circumstances might change but if you have at least a 4-5 year time horizon buying a home makes a lot of sense.
If you are thinking of selling do it right to maximize your outcome, but do not be afraid of the market. It is true that prices aren’t what they were a year ago and you will not likely get what your neighbor did at that time, but if you’ve owned your home for any length of time you will still do very well. Bay Area home prices will continue to rise but much more slowly, and I question whether it will materially outstrip inflation over the next few years. If that’s the case you won’t make more money by waiting.
I will be your real estate sherpa.
Like climbing a mountain, Bay Area real estate is a complex and risky endeavor. I am here to be your Sherpa. I’ll make sure you’re fully prepared and provisioned, have a clear roadmap to the top, and will get you safely to the summit.
And what a view it is!