What’s Exactly Going on With the Real Estate Market
/I’m no economist. I don’t have a crystal ball. I can’t tell the future. However, I can study data and trends, educate myself, and analyze how both historical events and current market demands continue to feed the current world of Real Estate. For all disclosure purposes, this is my (Bailey’s) current state of the market prediction. Let’s dig in.
THE CRASH
Yes, we’re all well aware of the market crash that was 2008, but what happened after? Builders stop building, and people were hesitant to buy or sell real estate. Many people were most definitely under water on their homes, and even more folks couldn’t afford the home they purchased due to flimsy lending programs or being qualified for a home way beyond their livable means.
THE “RECOVERY”
Fast forward 10 years, we entered 2018. As mortgage rates hovered near 4 percent, the real estate market, for lack of a better term, was “recovering.” During this period of uncertainty, and due to the prior crash, many builders quite frankly just stopped building. However, our country’s population has continued to grow creating the need for readily-available housing options.
THE “NORMAL MARKET”
When mortgage rates ticked down even further into 2019, real estate entered a period of what many call a “normal market” with balanced inventory, a healthy amount of buyers, etc.
During this time, too, the largest generation currently on earth (#Millennials) entered the home buying scene. Then, this increased buying population entered 2020. Hello COVID, and our economy went crazy. Facing a global pandemic, our economy needed funds.
Did you know: in the state of Florida, each real estate transaction nets approximately $70,000? This profit is created from the documents, state tax, preparation, deed and doc stamps, title insurance and its preparation, movers, lenders, etc. of each transaction.
This is when the Federal Reserve intentionally reduced mortgage interest rates to stir a desire for people to purchase, so that our economy could keep moving at some level. With these low rates, home buyers could afford way more home than they ever could before.
LET’S REVIEW
Let’s quickly review some factors we’ve discussed contributing to recent real estate:
Builders stopped building new homes for quite a while after the prior crash.
A huge generation reached the home-buying stage in life.
Extremely low rates where families could afford more house than ever before.
These three factors truly spiraled into the insane state off the market we saw in 2020 through the first half of 2022.
THE COVID TIMES
It may be important to note that when COVID happened, many sellers were unsure what would happen both financially in their world and economically in our country. Many also did not want people in their home, touring and touching things with this unknown virus, and pulled their homes of the market.
Remember, at this time in the early pandemic, we were already at a shortage of inventory from the lack of building. Then, when sellers pulled resale homes off of the market, we faced a severe shortage paired with the three factors outlined above (lack of inventory, more buyers, more budget). This is what drove to crazy bidding wars, which then led to the wild terms people were forced to purchase under (no inspections, appraisal waivers, free lease backs to sellers, paying sellers closing costs, etc).
I always explained the situation to buyers like a favorite children’s game: musical chairs — we have one chair left at the end of the game, but two people are playing. This was essentially the market, but let’s multiply the pressure by about 10. In one case, we had one home in a neighborhood for sale and about 10-15 families were vying for it. Offers went well over asking price, giving the seller all the terms they wanted, and so on. The demand drove the cost of materials up as builders could not keep up, etc. This then contributed to inflation and other factors, too.
THE SHIFT
In July of 2022, the Federal Reserve attempted to slow homebuyer demand and control inflation by beginning to raise mortgage interest rates. They started slowly, but then increased rates between 6% - 7% by end of the year.
Now, let’s talk reality for a second. In true historical data, interest rates between 4% - 6% are healthy, normal and average. However, so many Millennial consumers today (up until last year) have seen rates at only 3% - 4% and are set that a rate any higher is soooo high. Mortgage rates at 2% - 3% were forcefully manipulated that low during a global pandemic, and they are likely to never return, or we may see the results of the prior frenzy return. The mortgage rates of late 2020 through the first half of 2022 are not true mortgage rates.
REAL ESTATE TODAY, EARLY 2023
Over the last several months, The Federal Reserve has slowly made a few reductions, and rates at this time, based on several factors (credit, loan type, location, etc.) are teetering between 5% - 7%. Home price averages have obviously increased, and with higher rates, it has affected the rate and ability for many families to purchase homes.
As we approach an election year, my personal studies and market research have shown that rates do in fact tend to drop prior to an election. It’s my educated guess paired with my personal expertise that we will see rates return to an average of 4% - 5% within the next 12 months. But, only time will tell!
