You may have noticed the real estate market tightening and slowing in recent months. Homebuyers are becoming increasingly more cautious due to the feeling that they may be purchasing at the top of the market and will have to obtain a higher market interest rate compared to the past. This also translates to buyers being more difficult to secure in the marketplace for home sellers. This, in addition to an ever-rising interest rate market, is leading to more compression and more competition from lenders. And as the fight for consumers becomes ever more challenging, homebuyers who are in the market become ever more competitive to land for lenders. The fight for purchase business continues.
The Current Market
As many consumers have noticed, the current real estate market remains at a plateau. While we continue to see homes being bought and sold at a standard rate in the conventional markets, the move-up buyer — someone who buys a house that is larger and more expensive than the house they already own — is almost like a ghost.
As interest rates climb and housing prices stay flat, the move-up buyer market will not gain traction. The reason for this is very simple: Most people who currently find themselves in a good equity position in their home and purchased their home between 2012 and 2015 are scratching their heads. Those who do want to potentially move into a home in a better location, or want more square feet or updated finishings, are pondering if it’s really worth the move.
And here’s the conundrum: If they purchased their home in 2011-2013, and that home was $500,000 and is now worth $800,000, and their current budget is $1.1-$1.3 million, they may be asking themselves, “What do I really get?” The answer is not much more. This is because a home bought four or five years ago has seen significant appreciation. Therefore, even with a higher budget today, what they can buy doesn’t yield much more than they already have.
Even though the budget is on the higher end, consumers may find themselves saying, “If this is all I get for this amount of money, I think I’d rather stay in my home.”
More importantly, the current interest rate they are paying may be in the mid to upper 3% range, yet current rates are looking closer to 5%. Facing the possibility of getting out of an incredible interest rate to jump up to 100-150 mortgage points, thereby increasing their monthly expenses significantly even if their loan amount stays the same, smart consumers are saying, “No. I’ll stay in my home. Maybe we’ll remodel it.” And that’s what I’ve observed across the board.
Looking To The Future
Consumers are hesitant in the current market — not with only with what is available compared to what they have to spend, but even more importantly, getting out of an all-time rock-bottom low interest rate in exchange for a higher interest rate.
For consumers in the FHA and conventional markets, we see demand continuing to be rather strong — maybe not as strong as in years past, but still a solid market. In the high-end luxury market, we are predicting a little slow down, but that market as well should remain decent over the next 12 months. This opinion and prediction is based off of the historical ebb and flow of the luxury market, in addition to high interest rates.
However, what’s hurting the market right now is the move-up buyer. Particularly in the Arizona market, for example, the move-up buyer from $500,000 to $1 million seems really hard to find. These homes are sitting on average over 130 days longer than I saw them listing for last year. This is happening because encouraging the move-up buyer to take on a higher interest rate for a larger home is not sustainable. The move-up buyer wants to stay where they are in this scenario. They are more interested in investing money into a home for a remodel, or even an addition, rather than taking on the cost of moving and a higher interest rate.
The only solution that would help this situation would be for interest rates to lower. This move-up buyer hold-out could damage the market because it initiates a sort of freeze where homes aren’t going on the market and buyers aren’t interested in looking for newer or larger homes. This causes a slow market without a lot of turnover.
Generally speaking, the market tends to cool this time of year as the leaves fall and temperatures drop as well. There is nothing to be alarmed about at this time, but awareness of the current climate is key to making the best decisions for all.
Source: Jason Mitchell