There is a vast amount of noise about the real estate market caused by mainstream national media and social media, such that it has become very hard to find the signal amongst all the noise.
First, the sobering reality:
Interest rates are high. At the time of this writing, a conventional 30-year fixed rate mortgage is back up almost to 7%. This is almost twice the rate compared to 18 months ago, which has reduced borrowers’ purchasing power by more than 30%. That is, for the same monthly payment, buyers can afford far less home than before the rate increase. Moreover, interest rates are likely to stay elevated for the 2023 selling season, as the Fed is likely to continue its interest rate increases. As explained recently by Elliot Eisenberg, the Bowtie Economist: “While inflation fell from 6.5% Y-o-Y in 12/22 to 6.4% in 1/23, and core inflation similarly declined from 5.7% to 5.6%, its fourth straight decline, the declines are moderating. Worse, core-services inflation, which excludes energy and is the Fed’s favorite measure, has not declined for 17 straight months and is up 7.2% Y-o-Y. Inflation is migrating to services, and the Fed will surely raise rates 25 basis points in March and May.”
Home sales closings are off to a sluggish start. These higher interest rates, coupled with the negative narrative propagated by the media, have negatively impacted early 2023 home sales. In fact, sales are down almost 40% compared to the first six weeks of last year (keep in mind, however, that the start to the 2022 sales season was unusually strong).
Next, the encouraging news:
Buyer demand is growing. As I discussed previously, LendEDU found that 55% of home buyers during the pandemic were not satisfied with their purchase, and these people have substantial equity in their homes. In addition, many would-be buyers who put their home search on pause last summer and fall, due in large part to high rates and market uncertainty, are apparently reentering the market. This can be seen in the rebound off the bottom of the percentage of available homes under contract, which has risen in Boulder County from a low of about 27% to more than 35% and rising. In some areas, such as South Boulder, the percentage of homes under contract has surpassed 50%, which indicates a sellers’ market already forming there.
As an example, in February I myself had clients who put in a very strong offer on a competitively priced home in the Table Mesa area of Boulder. It turns out that there were nine offers on this home (which was in near-original condition), and the winning offer was more than $200,000 more than the asking price. While anecdotal, this demonstrates that there is a deepening pool of buyers for well-priced homes.
Inventory is up. The number of homes available on the market is almost 170% higher than this time last year. And while this number (around 400 homes on the market) is still significantly lower than the five-year average, it does mean that buyers have more to choose from in their search. This increased inventory indicates a more healthy, balanced market — something that we have been in need of for many years.
Guidance for buyers and sellers:
So, what does the above mean for buyers and sellers looking to participate in the spring market? For sellers, it means that there is likely a strong supply of buyers for your home. However, with higher interest rates and increased buyer sensitivity, sellers need to price their homes carefully and conservatively to help ensure a successful sale. For buyers, this will likely be a good time to be in the market. There are more homes to choose from, and they will likely appreciate more slowly this spring. Yes, interest rates are higher — and will likely stay elevated for some time — but lenders and Realtors have developed useful financing options to help combat this (contact a trusted professional to learn more). Also keep in mind that rates are projected to come back down at some point, so you can “marry the house and date the rate,” meaning that you buy the house now and refinance your mortgage when rates come back down.
Jay Kalinski is the owner of ReMax of Boulder and ReMax Elevate.