Understanding Our Weakening Real Estate Market

There is no doubt that the real estate market pendulum is swinging back from an all-time seller’s market. In a word, I would describe the past 18 months as INSANE. Sanity must return to the market, and we are seeing those signs. But we may see the normalcy return in fits and starts.

At present, it is the sentiment of all involved that is most changing our real estate market. And, I remind my readers, that statistics about the USA, Florida or County do not necessarily apply to your neighborhood. For an accurate estimate about your home value, please contact me directly.

The National Association of Home Builders has an index designed to gauge market conditions. The scale runs from 0-100, with anything above 50 being positive. Builder overall sentiment dropped 12 points in June to 55, according to a monthly survey from the National Association of Home Builders. That marks the largest single-month drop in the survey’s 37-year history with the exception of April 2020 (when COVID lockdowns occurred). While 55 is still positive, it is down from its March number of 80.

Three-year chart of overall builder sentiment.

Builder sentiment about current sales conditions dropped 12 points to 64, while sales expectations for the next six months fell 11 points to 50 and sentiment about buyer traffic declined 11 points to 37. That last number is what is of considerable note to me.

Just a few months ago, we had lines waiting outside open houses and multiple offers on the first day over asking, and sometimes sight unseen. What has happened since March?

Interest rates are certainly a large portion of the story that make buyers scarce these days. Mortgage applications to purchase a home were 19% lower than the same week in 2021. With rates almost double what they were in January 2022, Buyers have lost considerable purchasing power. Now that buyers can’t buy the home they dreamed of at the beginning of this year, sentiment has turned sour. In fact, mortgage demand just hit their lowest level since 2000, according to the Mortgage Bankers Association’s seasonally adjusted index.

I recently spoke with a number of Mortgage Loan Officers who report that lenders are starving for someone to talk to, let alone lend to. Underwriters are calling their MLOs asking if they can do anything for them today. Unheard of. Some lenders are closing down all together, while most are cutting staff considerably. The mortgage gold rush is over.

And who would think differently? The average interest rate for 30-year fixed-rate mortgages with conforming loan balances ($647,200 or less) is 5.82% with 0.65 points (including the origination fee) for loans with a 20% down payment. That rate was 3.11% the same week one year ago.

Another factor of the Fed raising the prime interest rate is that it also pushes credit card and auto loan rates up. Those increased payments crush potential buying power for homebuyers.

Sold chart for 33156 shows far fewer closings these days.

“Purchase activity declined for both conventional and government loans as the weakening economic outlook, high inflation and persistent affordability challenges are impacting buyer demand,” said Joel Kan, an economist for the Mortgage Bankers Association.

Inflation is a huge factor. Food inflation in the United States accelerated for a 13th straight month to 10.4% in June of 2022, the biggest increase since February of 1981. The food at home index rose 12.2%, the largest 12-month increase since the period ending April 1979. All six major grocery store food group indexes increased over the span, with five of the six rising more than 10%. The index for food away from home rose 7.7%, the most since November 1981. When you have to spend more to eat, there is less for everything else.

Gas prices seem to be a roller coaster ride, but we all know that a “comfortable” price has a “2” in front of it. This adds to our real estate woes too.

Locally, sellers have taken note of the many pressures on the market. It is as if the collective consciousness of anyone thinking of selling said, “Oh, I have missed the top and I better get on market right now so I don’t lose more money.” And, this is one of the biggest reasons for our current perfect storm.

The core of how any product is priced is based on supply and demand. And, put simply, we have more supply and less demand. Guess which way the pricing is headed. Unless we have a new contribution to the economic picture, the next 12 months will show a downtrend on home sale prices. Reality and normalcy have entered the building. Mark my words and take advantage.