As you can see in my mortgage-rate tracker (in right column), we had another meltdown today, and the conforming rate now is over 6% (with no points).
The idea of paying higher prices AND rates really discourages the move-up/move-down markets. Combined those with having to pay federal and state capital-gains taxes and the existing homeowners aren’t going to give moving another thought. They probably weren’t giving it much thought any way! And now they might have to sell their home for less? Forgetaboutit!
While most will be (rightfully) concerned about how the buyer pool could dry up, also keep in mind that for every move-up/move-down homeowner that decides not to move, the supply side shrinks a little more too.
Bill added more towns to this list, and it keeps showing how San Diego is bucking the national trend:
We’ve had enough buyers who NEED a house that sales will keep happening, regardless of mortgage rates. I’m sure buyers are hoping to just pay the list price, or less, to compensate.
Yet, after rates got into the 5s and several ER sales closed for less, here’s another over-list:
With mortgage rates blowing through the fives and another Fed meeting coming up on Wednesday, I think we can declare that the frenzy is over.
Or at least we can expect that it’s over in the buyers’ minds.
But one fact remains the same: There still isn’t anything to buy.
Will there be a surge of new listings? It would be very unlikely. If homeowners weren’t motivated to sell for all-time record prices during ideal conditions, they won’t be interested in the thought of taking less either.
There will be a transition period while buyers, sellers, and agents get comfortable with the new environment. The talking heads will keep reminding us that rates are still historically low, and that buyers have more negotiating power now (up from zero, previously).
By the time we get to the Selling Season of 2023 though, the market players (buyers, sellers, and agents) should establish a decent comfort level with the direction of the variables.
The big question is: What will happen between now and February?
We can probably count on these:
Superior homes that are priced at 10% under recent comps will sell.
Inferior homes that are priced at 20% under recent comps will sell.
Buyers will wait it out, sellers will wait it out, and agents will keep doing what they’ve been doing and ignore anything that’s negative.
Sales will plunge.
Ponder the other likely possibilities:
There are going to be occasional deals, and almost all of them will be on inferior properties. Because all homes will need more improvements to be able to sell for retail, more agents will be inclined to recommend a dump-and-run on the original-looking homes.
There will be a ton of false starts. We are already seeing new listings get cancelled pre-maturely or being refreshed with a new and improved price (but not improved enough to make a difference). There will also be wicked buyer’s remorse as friends and family react violently to those buying now.
Surprisingly, there will be bidding wars and homes selling over their list price. Of the 55 NSDCC houses that have closed in June, 62% of them sold for more than their list price. It’s almost like an addiction!
The market will be driven by the out-of-town buyers who really want and need to live here. They didn’t let higher prices stop them, and neither will higher rates. What are they going to do? Not move here? There might be fewer of them, and they might take longer, but they will keep coming – count on it.
This film was taken on May 25th, a month after mortgage rates hit 5%.
I can’t wait to hear from the doomers who swear that because sellers had to take a whopping $50,000 haircut off the list price to sell this house to cash buyers who closed in two weeks (with sellers who wanted to occupy until August 1st), that this comp means the market is in trouble.
Would you pay almost $3,000,000 for this house, plus free rent?
Realtors are saying that the market is slowing, and Marc D. suggested that we define what that means:
A slowing market is when fewer active listings are priced to sell.
It is a result of…..
Fewer buyers – Higher mortgage rates priced out some or most of the buyers hoping to finance their purchase. They are simultaneously hoping for prices to come down to compensate, and/or in the process of making other adjustments like considering smaller homes, widening their target zone, or offsetting higher rates with bigger down payments or an adjustable-rate mortgage. All of which take time, so more buyers than ever are in the wait-and-see mode, which means…..
Fewer sales – as more buyers move to the sidelines, it’s disrupting the incredible sales flow we’ve enjoyed over the last two years where virtually every home that came to market has found a buyer with relative ease. A new listing that previously had an 80% to 90% chance of selling in the first week now has a 10% to 20% chance of selling that quickly (example: there are 345 NSDCC active listings today, and there were 33 new pendings in the last 7 days), which means…..
Longer market times – with more unsold homes lying around, it gives buyers the impression that the ‘slowing market’ could mean lower prices are coming, which makes them more cautious. The longer a home is on the market, the more pressure is on the seller to do more improvements, or lower the price. Or they can also choose a third option and just wait in line and hope that they are moving slowly up into the group of 10% to 20% of active listings that have a chance of selling this week. This option is dependent upon the newest listings being more optimistic on price than those unsold currently, but because they have more recent data available on the perils of over-pricing, the newer listings should be sharper on price, not worse.
A slowing market means we have transitioned from the one-time-in-history event where every home sold quickly, to the old reliable sellers-waiting-in-the-queue, hoping for their lucky day to come.
With only 10% to 20% of the actives selling each week, it is inevitable that the unsolds will start stacking up as both sides wait longer for their lucky day. For some sellers, that day will never come, and they will cancel their listing instead.
Knowing that sellers will still insist on getting their price or close, how can buyers and sellers both know how close a home is to selling?
List-Price Accuracy Gauge
If you are getting showings and offers, the list price is within 5% of being right.
If you are getting showings but no offers, the list price is 5% to 10% wrong.
If you aren’t getting showings, the list price is at least 10% wrong.
The best thing a seller can do is to lower their price so they at least get out of the bottom tier – you need to have showings to have a shot at selling. The market is still hot (see map at the top), there just aren’t as many active listings that are worthy of the attention of buyers. The sellers are still in control of the marketplace, and it will be their reaction to wrong pricing that determines the outcome – as measured by the sales count.
Back in the day (3-5 years ago), there were 10:1 actives to pendings in the high-end markets like Rancho Santa Fe, an area where sellers have always been content to wait as long as it takes. I’ll never forget the RSF listing agent who proudly asserted that her one-year anniversary of her listing was coming up! Some people don’t mind being on the open market and not selling – they are only motivated to move if they get their price, which is fine. Hope you get lucky!
Sellers will be hanging around for weeks or months, hoping the mythical market conditions improve and that lucky couple with 2.2 kids shows up, rather than go to work on their pricing. As their lease comes due or the start of school gets closer, the waiting buyers will anxiously decide whether they will step up and make an offer, or keep waiting for the mythical two-in-the-bush that might be a better value.
This is the Big Standoff whose intensity will be measured by the number of sales that find the sweet spot of being within +/- 5% of the latest pricing trend. The vast majority of sellers won’t sell for less, and buyers will be very reluctant to pay more than 5% above comps.
This is the only other sale located on the Encinitas Ranch golf course that might be considered a comparable sale, but it’s a completely different offering. The house has 5,200sf with pool on a half-acre lot – with no threat of golf balls hitting you while in the backyard.
My buyers thought the price – which was more than a million dollars higher than my sale – was aggressive and not worth it. But as we have seen throughout the coastal region, a cash buyer stepped up and paid the full $4,785,000 price for it seven days after the listing was refreshed:
It closed escrow yesterday, so it’s doubtful that Zillow – or any buyers – would use it when evaluating homes in regular Encinitas Ranch. But if they did, they would be radically over-valuing the more standard tract houses there!
Previously I said that buyer-agents are getting cut out of the action.
There are so many reasons why:
Commissions are grinding down. Buyer-agents have to sell more, to make the same $$.
Working at higher price-points requires advanced skills. Can agents improve?
Are you good enough to convince the buyer to pay your fee? It’s coming.
Fewer listings will be exposed to the buyer-agents, and to the public.
Smart sellers who offer a bounty, or reward, to agents will attract the most eyeballs, buyers, and offers. It is a system, powered by the MLS, that has worked well for decades. But it is coming to an end, sadly.
The pending lawsuits against NAR and major brokerages will likely cause the de-coupling of the commissions, and sellers won’t be able to offer a bounty (commission) to buyer-agents.
But buyer-agent commissions have already been dropping over the last two years, in part because the listing-agent teams don’t respect or care about outside buyer agents. During the frenzy, the listings sold themselves, so why not just keep most of the commission? Or all of it?
What will happen post-frenzy?
The frenzy conditions that pushed prices much higher have devastated the move-up/move-down market. Homeowners love living here, and if they have to leave town to make selling their home worth it, they aren’t as interested.
As a result, it looks like the amount of listings will keep dropping:
Detached-Home Listings between La Jolla and Carlsbad
Total Number of Listings, Jan-May
Total Number of Listings, May
Even after mortgage rates rose dramatically, the number of new listings last month were way below previous months of May. As it gets more difficult to sell and potential home sellers get discouraged about not getting astronomical sales prices, the listing counts could dwindle further.
In the squeeze, listing agents will get more desperate and choose not to share their hot new listings with outside agents, or even within their own brokerage. Buyer-agents who are dependent upon the MLS for homes to sell just won’t have any product.
It’s already happening – the homes you see on the open market seem like the leftovers. It’s already happened with commercial listings on Loopnet, and new-home tracts don’t want to pay buyer-agents at all:
It’s inevitable that the same mindset will infiltrate the residential resales too. Buyer-agents will get squeezed out because nobody wants to pay for them, regardless of how valuable their service might be.
Speaking of infiltration, the impact of OpenDoor probably deserves its own blog post. Because NAR sold our website realtor.com (the best thing we had going for us) to a third party, other entities are now advertising their services on realtor.com that will take away business from realtors.
Input an address of a lower-valued home onto realtor.com, and you’ll see something like this:
As listing counts erode, the desperation among agents will heighten. Buyer-agents will be the first casualty, and then buyers and sellers will feel the pinch too as the MLS dissolves and private websites are used sell homes privately:
The frenzy interrupted the need for off-market sales because all sellers and listing agents wanted to go on the open market for the thrill of a bidding war. But as the market gets tougher, the off-market sales will likely resume. In the process, the buyer-agents will be the first to go, and because there are already way too many agents (at least twice as many as we need), many other agents will face an early retirement too.
Mike is one of the more level-headed analysts, probably due to the wealth of national data he processes. There will probably be a solid undercurrent of activity as evidenced in the graph above:
Prices, meanwhile are still strong. 5 bidders instead of 50 bidders will still support your asking price. Prices holding up stronger than I expected frankly. $449,000 for the median single family home in the US now.
We’re going to be hearing for months about how sales are dwindling.
It’s mostly due to comparing 2022 stats to last year’s numbers, which were the most frenzied-up numbers ever. But it is also due to it being a market for the affluent now.
Look at the chart above. Even though sales are down 7% overall, the higher-end sales are booming:
San Diego County Detached-Home Sales, Jan 1 – May 31
SD County Detached-Home Sales
Sales Over $1,000,000
As recently as 2019, the million-dollar sales were only 18% of the total sales count. This year, it’s 46%, and we still have a week more of sales plus late-reporters to record. It could hit 50%, just three year later!
Yet the total number of 2022 sales will only be 10% to 12% behind those in 2021, the craziest year ever.
Plus, if there were more quality homes for sale priced over $1,000,000, we’d have even more sales!
@mikesimonsen @Milehighmilede1 Probably worth noting that according to our latest report at @Attomdata, 90% of borrowers in foreclosure have positive equity - many have more than 25% equity. During the last cycle most borrowers in foreclosure were underwater on their mortgages. Big difference.