It’s no longer a house seller’s market
In 2011 the market was extremely favorable to buyers. There was plenty of inventory, and the sellers were motivated to sell at whatever the market would bear. Banks were liquidating their own portfolios of REOs, and short sellers were allowed to complete their transactions without the banks asking for repayment of the shortfall. Plus, prices were falling and buyers were rare. As a buyer in those conditions, you could buy what you wanted without competition and get a good deal too.
Then 2012 rolled around, and lenders made a number of policy changes which caused the market to abruptly shift from an extreme buyer’s market to an extreme seller’s market, almost overnight. Lenders stopped foreclosing on delinquent mortgage squatters, and they began demanding short sellers repay the shortfall. These two policy changes dried up the MLS inventory. Further, unprecedented federal reserve policies of buying 10-Year Treasury Notes and mortgage-backed securities drove interest rates down to record low levels. This gave buyers the ability to raise bids, and it put home ownership within reach of many marginal buyers who otherwise couldn’t afford home ownership. Remember, there is nothing natural or organic about this housing market recovery. It’s entirely predicated on policy decisions in the boardrooms of major banks and the federal reserve.
When the market abruptly changed in early 2012, nobody put out a universal memo to let market participants know what was going on (although Calculated Risk posted about it). It takes months for market participants to recognize a significant change in the market even if the change is sudden.
In May of 2013, the federal reserve stated talking about tapering its purchases of 10-Year Treasury Notes and mortgage-backed securities. This scared holders of these securities who began selling in earnest. Nobody wants to be the bagholder when the federal reserve stops buying, so the selling pressure on these securities became intense (and still is). As bond prices collapsed, interest rates soared from 3.5% to almost 4.75% today. That’s a huge increase in borrowing costs. When the increased borrowing costs are combined with prices that are 10% to 40% higher depending on the market, affordability crumbles. And as affordability wanes, marginal buyers are priced out of the market, buyers reassess whether or not they want to buy, and demand falters.
The extreme seller’s market and rising prices prompted many sellers to believe this was a good time to sell their houses, so many new listings came to the market — just in time to sit there as the buying pressure evaporated.
During the spring of 2013, I was advising potential sellers to take the deals being presented. Of course, many decided to be greedy and wait for even higher prices next year, and those that waited are now sitting on listings that aren’t moving. Perhaps demand will return next spring and they’ll get their higher price, but it’s also likely that next spring may have 5.5% interest rates, and sales prices will be even weaker.
Is it a buyer’s market?
Based on what I am seeing today, I believe the seller’s market is over (at least for now). Perhaps interest rates will go down and reignite buyers, but I rather doubt it (See: Housing affordability set to plummet as interest rates spike again). It’s possible that the federal reserve’s announcement of the taper pulled supply forward, and in coming months, the lack of sellers will cause bonds to rally and interest rates to fall. In my opinion, tt seems more likely that the removal of $85 billion in monthly demand will cause bond prices to fall even more.
So if it’s not a seller’s market, is it a buyer’s market?
No, it’s not.
Think back to the market conditions in 2011. We had plenty of inventory, and the sellers were motivated to sell at whatever price the market would bear. That’s the sign of a buyer’s market. That isn’t what we have today. While there are more listings today than in the spring, the MLS inventory is still depleted relative to historic norms. Further, the inventory that’s present is can’t-sell cloud inventory, not must-sell shadow inventory. The current batch of sellers with their WTF peak asking prices can’t lower their prices to complete a sale.
The additional inventory and lack of demand means it’s not a seller’s market. The lack of must-sell inventory and high asking prices means it’s not a buyer’s market either. Perhaps some may call it a balanced market, but with the unique blend of market manipulations and policy dependencies, I prefer to call it a dysfunctional market that we’re stuck with and trying to figure out.
While homebuyers continue to be frustrated by low inventory, this quarter they were nearly equally concerned with rising mortgage interest rates. Respondents blamed higher rates for harming their ability to buy a home and for changing the pace of their home search. Also, buyer expectations that prices will continue to rise dropped sharply this quarter. A further indication that the market is becoming more balanced, fewer buyers believe now is a good time to buy a home. At the same time, fewer believe now is a good time to sell.
That really is a strange result that both buyers and sellers believe it’s getting less favorable for them. In my opinion, we will likely see a significant decline in sales volumes and buyers pull back and sellers are unable to lower their asking prices.
Here’s what buyers told us this quarter:
- Rising mortgage rates are making it harder for would-be buyers to afford a home: A total of 63 percent of respondents said that rising mortgage rates this summer have negatively impacted their ability to buy a home.
- Rising mortgage rates are causing some buyers to speed up, others to slow their search: Thirty-three percent of respondents said that the rising level of mortgage rates this summer led them to increase the pace of their home search while 20 percent have slowed their pace. One percent reported that higher rates stopped their search altogether.
It’s natural for buyers to slow their pace in response to the uncertainty, but I advise against it. The increased inventory and increase seller motivation will make it easier to get a property, and if it’s a motivated organic seller, a buyer over the next few months may even get a deal.
- Homebuyers believe that the market may be shifting from seller control: Buyers who believe now is a good time to sell in their neighborhood fell to 63 percent from 66 percent last quarter, marking the first drop in three quarters.
Homebuyers who are paying attention to the market (and reading blogs like this one), see the market changing. Properties are sitting on the market longer, and fewer are obtaining multiple bids.
- Homebuyers are most worried about low inventory, rising mortgage rates: Low inventory remains a key concern for buyers at 58 percent, down eight points from 66 percent last quarter. Respondents cited rising mortgage rates, a new question, as their second largest concern at 53 percent.
It is a better time to buy than most realize
The biggest surprise for me in the Redfin data was the response to whether it was a good time to buy. The number of buyers who believe so has cut in half since late 2012.
Buyers are having the wrong reaction to rising rates. Sure, houses are more expensive, but it isn’t likely that either house prices or interest rates are going down. House prices won’t go down much due to the nature of cloud inventory and the lack of REOs. Interest rates aren’t going down as the federal reserve hasn’t even begun tapering yet, and interest rates are rising. Further, based on historic norms, affordability is still good — it’s not nearly as good as it was, but it’s still good.
The way buyers should react is to view this an opportunity. The other buyers — the ones who they were competing with a few months ago — are either priced out or scared out of the market. With less competition, it will be easier to obtain a house. Personally, I think this fall and winter will be a good time to be a house shopper. It will certainly be less frustrating than this spring was.
Whether or not this is a good time to buy is debatable, but I feel confident in saying it’s no longer a seller’s market.
What I fight against
One of the primary causes of the housing bubble was greed. People want to buy houses (or any asset) because they believe the price will rise, and they will become rich. With houses this becomes even more enticing because lenders have been willing to convert appreciation to cash via mortgage equity withdrawal. The desire for free spending money on rapid appreciation is the essence of kool aid intoxication. It’s the worst possible reason to buy because it invariably leads to disappointment. Either the appreciation doesn’t materialize, and the buyer is unhappy, or it does materialize, the buyer takes the free money, and the buyer loses the house.
Despite the problems with buying for appreciation, a third of today’s homebuyers are still motivated by it. They learned nothing from the housing bubble — except perhaps that the government will bail them out if their purchase doesn’t turn out as planned.
The more expensive the house, the bigger the Ponzi
A popular yet misleading idea in the popular culture is that poor, subprime borrowers were irresponsible with their mortgage debt, and that created a crisis for everyone else. The fact is HELOC abuse was rampant in every neighborhood across all socioeconomic levels. In fact, the more expensive the house, the more free money was given to the Ponzis who infested them.
The seller of today’s featured short sale started with a $527,000 debt. He finished with a $900,000 refinance and extracted $374,000 along the way. Further, since he was issued an NOD in February of 2012, he hasn’t made any payments in nearly two years.
If he doesn’t have any assets, he will likely just walk away. His credit will be ruined, but that seems a small price to pay for $374,000 in free money and two years of squatting.
[idx-listing mlsnumber=”MB13118596″ showpricehistory=”true”]
875 ACAPULCO Laguna Beach, CA 92651
$1,000,000 …….. Asking Price
$620,000 ………. Purchase Price
8/13/2002 ………. Purchase Date
$380,000 ………. Gross Gain (Loss)
($80,000) ………… Commissions and Costs at 8%
$300,000 ………. Net Gain (Loss)
61.3% ………. Gross Percent Change
48.4% ………. Net Percent Change
4.3% ………… Annual Appreciation
Cost of Home Ownership
$1,000,000 …….. Asking Price
$200,000 ………… 20% Down Conventional
5.17% …………. Mortgage Interest Rate
30 ……………… Number of Years
$800,000 …….. Mortgage
$211,087 ………. Income Requirement
$4,378 ………… Monthly Mortgage Payment
$867 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$208 ………… Homeowners Insurance at 0.25%
$0 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
$5,453 ………. Monthly Cash Outlays
($1,265) ………. Tax Savings
($931) ………. Principal Amortization
$408 ………….. Opportunity Cost of Down Payment
$270 ………….. Maintenance and Replacement Reserves
$3,935 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$11,500 ………… Furnishing and Move-In Costs at 1% + $1,500
$11,500 ………… Closing Costs at 1% + $1,500
$8,000 ………… Interest Points at 1%
$200,000 ………… Down Payment
$231,000 ………. Total Cash Costs
$60,300 ………. Emergency Cash Reserves
$291,300 ………. Total Savings Needed