Over the last few decades, the 30-yr fixed mortgage rate has run at 1.75% over the 10-yr yield – which if true today, it would put us at 5.0%, instead of 6.0%. Here’s what the MND thinks about the bond yields:
As for Treasuries, yields are now high enough as to be pricing in virtually all of the expected Fed rate hikes over the next year. Once that happens, the only way for them to go much higher is for the data to deteriorate further. Bottom line: if we can avoid upside inflation surprises like last Friday’s, we may have just seen the highest rates of the year.
If the bond yields settle down (the 10-year was 3.48% on Monday), and bring in more MBS buyers, then maybe the mortgage companies can give up the extra 1% spread they are sitting on today. Our chances of survival will be much more likely with 5% mortgage rates, then 6%!
By the end of today, the 30-year mortgage rate should be in the mid-6s – who would buy a house now?
Between higher prices, higher rates, and the hefty federal and state capital-gains tax, the move-up/move-down homeowners are effectively locked in to their existing home. It’s just too hard to make sense of a move, unless there is another strong reason to overcome those.
It would help if they don’t mind leaving town, and probably leaving California. But who wants to do that?
Without the move up-and-downers, the supply and demand will both be greatly diminished, and the number of sales should drop significantly. But there will always be sales!
Here are the potential buyers who might still be interested, even at 6%-7%:
The Mega-Rich – When they see something they like, they just buy it.
Tenants – They are sick of how high the rents have become, and they don’t want to keep moving around trying to ease the pain. Some inheritance would help.
Inheritance/Gifts – They have been waiting, and now their ship has come in.
Job Transferees – They are used to owning, and they usually have their company’s blessing – and relocation package ($$) to assist them with the transition.
Contarians/Opportunists – The deal hunting will kick into high gear.
Self-Employed – Lenders should ease up a bit on underwriting to keep the doors open, and the alternative mortgage products might get more love. Qualifying with 24 months of bank statements, instead of tax returns, and getting a 8% or 9% rate won’t sound as onerous as it did when rates were 3%.
Most Everyone at a 10% to 20% discount – Those who stay in the hunt might get lucky!
Hopefully, the floor for NSDCC sales should be around 100 per month while the market recalibrates in preparation for the next selling season.
If sales drop below 100 per month, then I’ll be looking for the panic button!
Coming off the initial covid months, everyone thought the red-hot market was an acceptable reaction to the way our world had changed. But it’s gone too far, and somebody had to do something – and the Fed is going to do it again tomorrow, which will continue the rise in mortgage rates.
It means sales are going to tumble, which is nothing we can’t handle.
Here’s how it looks so far:
NSDCC June Sales
2017: 360
2018: 299
2019: 282
2020: 274
2021: 357
2022: 61
Currently there are 198 homes in escrow, and 68 of those were marked pending this month.
Of those that went pending prior to June 1st, let’s guess that 100 of them will close in June – and there might be a few others that are just coming together this week with a quick close date in June too.
It will make for around 180-200 NSDCC sales this month! It’s quite a bit lower than usual, but we’ll survive.
We’ll have more unsold listings, longer market times, price reductions, and fewer sales – it’s all part of the recalibration! Additional price reductions are an unreliable indicator because you don’t know how crazy the recent list prices were in the beginning, and they have never been so optimistic, even for the frenzy.
The closed-sales pricing will be the last thing to change, if at all.
I’m sticking with my +/- 5% for NSDCC pricing here in Plateau City.
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!
