Experts Warn of Potential Home Sales Plunge in 2023
The latest national news headlines say we could experience the lowest level of home sales since 2010. That according to an article by Jennifer Sor published back on February 21st on Markets Insider. Does this mean Boulder home sales could plunge this year? Or is this another example of national news being different from our local Boulder real estate news?
There are a number of factors influencing the marketplace right now.
Home Buyer Bad News: Rates Inching Upwards
Home mortgage interest rates are higher than last year. Heck, rates are significantly higher than anything we’ve seen in recent years. The new normal for home financing will play a role in existing home sales.
Inching might be too nice sounding. In the span of a few short years, rates have doubled for some home buyers. Even versus year over year, home mortgage rates are north of a point higher.
Is The Economy Heading for Recession or a Soft Landing?
The Federal Reserve keeps talking about an impending recession. In turn, this is causing consumer fear. Would a recession typically impact the Boulder housing market?
Most economists suggest real estate actually benefits from a recession. This sort of information sort of flies in the face of what I thought hearing all this talk of recession, recession, recession.
And what does it mean, “Soft Landing?” Turns out this last bit might be good for the priceo f eggs and the availability of toilet paper but not so ideal for Boulder real estate investors.
Stalling Home Sales Impact Housing Inventory
And what about local inventory of homes for sale? Do we have more homes for sale or fewer today versus a year ago? What can Boulder home buyers expect by midsummer? For that matter, how should existing homeowners best prepare for getting their homes on the market and sold in this economy?
The thing is, we are starting to see a number of indicators that our local market is changing. Just today during a Berkshire Hathaway HomeServices meeting, a presenter was saying that the market is once more having seasonal variation. Something we really haven’t experienced in several years.
National association of Realtors Predicts Price Growth
Just in. The National association of Realtors predicts 4.78 million existing-home sales in 2023, down 6.8% from 5.13 million in 2022. And at the same time, an anemic growth in prices of three tenths of a percent. Lawrence Yun, NAR chief economist and senior vice president of research made this prediction in December 2022 during NAR’s fourth annual Real Estate Forecast Summit.
The good news is that existing-home sales are going to see price growth. However what you likely read and reread is that nationally home sales plunge. The thing is though, that’s not necessarily what is happening here in Boulder.
We saw month over month transactions jump from December of 2022 to January of 2023. I just published a video blog update on that. You can watch below.
Something I’ve heard ever since getting into this career is that real estate is local. We still have a number of factors driving people to move to this part of the country. Jobs, lifestyle, personal freedom, the great outdoors.
Hey Bob What Caused Housing Crash in 2008?
Oh yeah. That. Man, I’ve heard people say they are staying out of the market because of fear of the market crashing again. I’ve been hearing it for the last decade. I’ve got news for you. Anyone that avoided the US Housing market for the last decade lost out on one of the greatest wealth creation opportunities of our generation.
Let me repeat that. Anyone who avoided the US Housing market for the last decade lost out on making a lot of money through equity gains in their home’s value. And equity is just one aspect of what makes home ownership such a great value.
So no, I don’t think things are going to repeat.
Housing Market Crash 2021
Some of the national news types predicted doom and gloom. But the Covid-19 pandemic was in full swing. And everyone needed a school classroom. Two home offices. And a gym. Housing supply crashed to low levels and housing market activity went through the roof. Oh, and prices went up big time.
So, no, I don’t think there is a market crash around every corner. And you shouldn’t either. Looking back to 2008, let’s talk now and then.
Then Mortgage-Backed Securities Caused the Economic Downturn
So let’s first look at the difference between now and then. Back then someone got a brilliant idea to package up securities and sell them as a financial vehicle. Big banks and trading houses piled in. Problem is, some of the mortgages were no good. As these assets tanked, it rippled through our financial system wreaking havoc. By now, you’ve probably read a ton about that time in our country. To keep it simple, what happened then is not what is happening now.
Rising Mortgage Rates Collided with Unqualified Home Buyers
One of the biggest is that back in 2008, the mortgage industry was giving home loans to just about anyone with a pulse. There were on no-income verification loans. Heck, you didn’t even have to prove your assets.
As a result, just about anyone could get a loan. And, truth be told, a lot of underqualified people did just that. When mortgage rates rose, colliding with Adjustable-Rate Mortgages that were resetting as home values softened, it was the perfect storm.
This is No Foreclosure Crisis
Today’s housing market couldn’t be more different. So I don’t think we will see a repeat of what occurred back then. We also have some guardrails in place to prevent the financial sector from monetizing securities (your home mortgage) in the same way that was done back then.
And also, we have far fewer homes even for sale versus back then. So, I don’t see a housing bubble or Boulder housing crash anytime soon.
But, we are starting to see rising interest rates impact our local economy. And prospective buyers are looking for something different than consumers than even just three years ago. For one thing, buyers no longer need two home offices and a school classroom in their house.
Let’s examine some myths out there.
Should I wait for the recession to buy a house?
No. Waiting for the recession to arrive is not a good idea. Here’s why. Home mortgage rates are impacted by inflation. Right now, inflation is high and guess what? That is impacting home loans with interest rates skyrocketing. And the number of home buyers is falling.
Should a recession really come along, that will take interest rates back down. Before you say that’s what you want, consider this. When home mortgages were cheap, everyone and their brother jumped into the housing market.
There were young people house hacking, as well written by recent guest blogger and lender. Buying homes, renting all the bedrooms, then a year later buying another. There were also long time “can only afford to rent” sorts of people becoming home buyers. There were folks looking to get out of their parents’ basements.
In short, there was just about anyone and everyone. And as a result, homes would come on the market, receive a gazillion offers and sell for $100,000 over list price.
You don’t want to wait for that to happen again. Save your hundred thousand dollars. You want to buy now. There is far less competition in today’s market. You might be the only one making an offer on any given house for sale in Boulder Co.
There’s an advantage to that. If it’s just you, you might be able to negotiate a better deal. In December 2022, we saw Boulder home buyers getting the best deals in a decade. That shift happened brutally fast too. In the Spring of 2022, Boulder home sellers were getting the absolute top of the housing market. By winter, home sellers were giving the largest concessions we had seen in last five to ten years.
When the recession hits and mortgage rates fall, the market is going to change abruptly. Rather than try to time that moment, why not have the best of all worlds? Buy with less competition and softer housing prices and more negotiating power today. Then refinancing into the best interest rates during the recession. That’s a win-win.
Home Price Growth and Soft Landing
So there are a couple of issues out there that are real. First, home sellers want to be aware the landscape is changing. That is, while your neighbor might have gotten more than ever for her similar house in the Spring of 2022, the market today is already vastly different.
Second, if the Federal Reserve is successful in eliminating inflation, we want to avoid the quote unquote soft landing everyone is talking about these days. Both of these subjects will impact your home buying and selling decisions.
Let’s start with a soft landing.
Federal Reserve Raising Interest Rates
The rate hikes you are hearing about are for credit. Consumer spending using a Visa card. Or going down to your local car dealership and buying a new ride. Or even stalking up on more toilet paper and eggs to weather the latest The Last of Us zombie apocalypse.
As The Fed raises rates, the cost of credit gets more expensive. And you and me have to pay more in monthly payments for the stuff we want in life. Unless we are lucky enough to be paying cash for everything.
But contrary to popular belief, these Fed hikes don’t impact home mortgage interest rates. Rates are driven by the bond market. And inflation. I’ve covered the inflation part already, but bottom line, as inflation comes down we should see home mortgages fall. Back to 3 percent? No way. But I think into the mid fives for sure.
The dreaded soft landing comes into play if the government is successful in increasing rates enough to slow the economy, but not put the country into recession. Eggs and toilet paper become more affordable. You can drive across the country and fill your car with gas at a reasonable expense.
But that soft landing avoids a recession. And the recession typically impacts home mortgage rates. Today’s housing market wants that recession, so that everyone buying today at higher rates can refinance into a less expensive monthly payment. The recession, or hard landing would actually be a good housing market correction for owners with home loans.
So with any luck, Powell gets it wrong, over cools the economy, pushing America into a recession and everyone buying a home right now gets to refinance into a lower rate. A real win-win.
And then there is home price growth. Talk about local.
Local Housing Demand
Sports talk is big around Denver. And I’m reading about a former Denver QB’s home for sale. I see on the news it is coming down in price. That’s sort of inline with what’s happening to all the non-football houses for sale. Price repositioning is very common in this market. And while this house in question is getting less expensive, it is still way up in value from where it was when it was purchased.
Thing is, your house is likely up in value too. Maybe not as much as your neighbors who sold at the tippy top of the market. But house prices are up. Pricing it correctly in this market is more important than ever. Home prices a few years ago could lead the market. That is, you could overprice and a couple of hot weekends later, the market liked your price and the place was snapped up in a bidding war. That’s not the case today. Home prices are softer, and pricing correctly or being open minded to a true value market offer is critical to your success as a Boulder home seller.