Real estate professionals understand that consumers, by and large, ignore housing statistics and the market until they become involved in the purchase or sale of property. It's only natural then that what impacts the market is a bit of a mystery to many. What determines a buyers' or sellers' market? What factors influence home prices?
Of course the answers to these questions and more may be multi-faceted, but it's important to pay attention to them if you hope to keep more of your money when it's time to buy or sell real estate.
Believe it or not, even when the world is in turmoil and the economy as a whole faces uncertainty, there will be a glimmer of light in the real estate market.
Pay Attention to Interest Rates
It certainly is no secret that obtaining a lower interest rate for a mortgage typically allows for a lower payment. Naturally then, low interest rates make home-buying an attractive venture—and, even whispers of a rate hike can spur folks to get out into the market.
For instance, by the end of 2015, the U.S. saw 5.26 million home sales, which was the most robust housing market since 2006. Lawrence Yun, chief economist for the National Association of REALTORS® (NAR), attributed the robust market, in part, to the mere “prospect of higher mortgage rates in coming months.”
And, rise they did, throughout the following year. In fact, late in 2016, mortgage interest rates rose eight times in nine weeks, according to bankrate.com. Sounds rather gloomy until one recognizes that, post-hike, rates were still at historic lows.
Interest rates held pretty steady until the beginning of 2019, when trade tension with China, a perception of an economic slow-down and persistently low inflation led the Fed to reduce their funds rates and investors to gradually shift capital from an uncertain market to more stable U.S. treasury bonds. This, in turn, impacted long-term mortgage rates. Now, since the COVID-19 pandemic, interest rates have again fallen dramatically to new lows reaching an average 30-year fixed APR of 3.32% on June 9, 2020 according to Nerd Wallet.
What does this mean to your pocket-book and how much you can afford? With a historical average 30-year fixed APR of around 6%, a $900 monthly payment will afford you a $150,000 loan. With an average rate of 3.32%, a $900 monthly payment will afford you a $205,000 loan. A staggering difference of $55,000!
The bottom line is that if you're in the market for a home and interest rates decrease or remain attractively low, it's time to get excited about the housing market.
Pay Attention to the Economy
Everyone remembers learning about supply and demand in their high school econ class. When demand is high, prices increase. When supply is high, prices decrease.
The current economy is a key factor affecting the real estate market. “Broadly speaking, when the economy is sluggish, so is real estate,” claims Joseph Nguyen at Investopedia. When job growth is robust, consumer confidence rises and we're more apt to spend money on high-ticket items, such as cars, appliances, vacations and, yes, homes. This idea represents the demand curve on your supply and demand graph.
Since the end of the great recession, our economy has seen the longest consecutive rise in history... until the pandemic. The Corona Virus triggered unprecedented job-loss when businesses, restaurants, factories, everyone closed their doors and we stayed inside to limit the spread.
High unemployment has hurt the economy and demand in the real estate market has decreased accordingly. However, not as much as you may think. The stock market took a brief dip before roaring back. Here in Chattanooga, we've only had 61 fewer YTD home sales than in 2019. Most analysts predict a short, V-Shaped, recovery. And, in recent years, the duration of real estate downturns have gotten shorter and shorter due to market efficiencies.
As for the supply side of the equation, home inventory is incredibly low. Leading up to the housing crisis in 2006, sub-prime mortgages created a housing bubble. That bubble popped... dramatically. Over the next decade plus the economy recovered, the housing market recovered, home inventory did not. Now COVID-19 has dropped active listings even more, decreasing 17.9% YTD in Chattanooga. While we remain optimistic that the pandemic will subside and builders will increase inventory, we need more listings!
For more information on COVID-19 & Real Estate, check out my April 2 post.
Selling Your Home This Year?
There's an old saying in the real estate industry that counsels homeowners that the best time to sell a home is when you need to sell your home. Yes, we understand that isn't very helpful. If you're one of the fortunate who has no compelling reason to sell (such as a job offer in a different town or divorce), you have the luxury of choosing when to put your home on the market.
Get excited if your REALTOR® mentions the words “sellers' market.” This is a period in which there are few homes for sale but buyer demand is high. During sellers' markets prices typically increase rapidly and homes sell at or above list price, often with multiple offers... good 'ol supply and demand.
Real estate professionals measure supply as an Absorption Rate, In Months. Absorption rate is defined as a rate at which available properties are sold over a particular time-frame. So, if we have 1,000 listings and 100 sell in one month the monthly absorption rate is 10%. We take that absorption rate and figure out how many months it would take for all of the available properties (not accounting for additional listings) to sell. We define a "balanced" market as a 6 month absorption rate, meaning at the current rate, it would take six months to sell all of the available inventory. A "sellers' market" is anything below the 6 month absorption rate threshold.
We began 2020 in Chattanooga with a 2.39 month supply and now we are barely hovering above 2 months... we are very much in the middle of a "sellers' market" right now.
One of the biggest mistakes we see in a sellers' market is the homeowner who feels that the market itself will bring top dollar for the home, regardless of condition. Be aware that it's the homes in good condition that sell the quickest and for the most amount of money. Regardless if market conditions favor sellers, if your home isn't in move-in condition, it may be passed over by home buyers. Ask your REALTOR® for advice on what repairs and upgrades to focus on to sell quickly and for maximum money or check out my April Blog post featuring Home Renovation Tips.
Buying a Home This Year?
Want to stop paying your landlord's mortgage and invest in your own future? Need a larger home for your growing family? Ready to move closer to all the local events in a certain community?
Get excited for a buyers' market!
A "buyers' market" is commonly defined as having a listing supply at anything above the 6 month absorption rate mentioned above. When there is a large selection of homes for sale and few other buyers in the market, prices aren't rapidly escalating and you won't be competing against a slew of other buyers. Unlike a sellers' market, you're less likely to encounter multiple-offer situations and can, therefore, feel more relaxed.
While supply and demand dictates pricing, as a buyer, your real concern is affordability. This is where mortgage rates come into play. Low rates and relaxed lending guidelines, such as we saw in 2015 and 2016, presented a prime opportunity for many would-be buyers who previously couldn't afford to purchase. And in a post-pandemic 2019, rates are lower than ever!
Lower mortgage rates mean a lower monthly payment, which means you have more purchasing power, and that additional power can "mean the difference between buying a 2-bedroom home versus a 3-bedroom one; between buying a home with large closets versus small closets; and, between buying an upgraded home versus a dated one," according to Dan Green at The Mortgage Reports.
In a sellers' market, however, it's more important than ever to have all your ducks in a row before making an offer on a property. Ensure you know exactly how much you can spend and that you've obtained a pre-qualification letter from your lender. Make your offer stand out from others by keeping it lean and mean, with the shortest time periods for contingencies as possible. Finally, come in with your highest and best offer. A sellers' market moves too quickly to assume the homeowner will negotiate over price.
Regardless of the media's perception of the housing market, there is always a mix of good and bad news, whether you are in the market to buy or to sell. Arm yourself with a professional REALTOR® who can supply you with current and local market information (too often what you read in the news is stale and based on nationwide statistics), follow his or her advice and buying or selling a home in any market will be an exciting process.