Friday, March 11, 2022

Market Forces are Colliding

I have been on about the interest rates, inventory, prices, and economic factors all converging on our red hot real estate market here in Clark County and around the Metro Area. Generally real estate trends are not that hard to follow and short term predictions have been reasonably easy to make. But the last several years we have seen several wildly different flies in the ointment of the market.

We just came out of a serious pandemic that had millions of people out of work, we had a government infuse trillions of dollars into economic aid during the pandemic, and people have been slow to return to the workforce. On top of that we have pressures coming from inflation and the climbing interest rates associated with hyper-inflation.

What many see as a flood of buyers to the market is in reality a lack of sellers in the market. We are sitting on a great time to be a seller and yet sellers are not selling. So despite the fact that higher rates are eliminating buyers from the marketplace, prices are still rising as even fewer properties are listed for sale. This is one of the most bizarre real estate market scenarios I have seen in more than 20 years in the business.

Higher rates would typically price out buyers thus lowering demand and potentially lowering prices. But inventory levels are at historic lows right now and that is pulling harder on the market right now than the higher interest rates. Valuations may not have the same 18% year over year growth like 2021 but we are still on pace for double digit growth even as rising interest rates begin eliminating the buyer pool.

One of the issues in favor of higher home prices is the absolute shortage of labor in the workplace. Wages are rising as desperate employers seek employees to fill millions of open jobs nationwide. Skilled labor is commanding the highest wages we have seen in decades even when adjusted for inflation. It is rare to have wages keep up with inflation but so far it has been close enough to keep enough buyers in the pool to maintain a seller's market.

Market forces are colliding and this is not sustainable, something has to give. I think interest rates will be the levee breach the brings the flood. Interest rates under 6% are still historically lower than average, but after years of sub-4% rates even low rate sin the 5s will cause buyers to fall out of the market. I think 5% rates will be the point where we see a softening in demand to get prices back into to a healthy growth cycle. If rates pop up over 6% we may see actual prices come down a bit.

No one knows when a flattening or drop in valuations will come, but we are definitely getting close to the top of the market and sellers thinking about maximizing the value in their home ought to list now or very soon.

For buyers buying right now, you should be prepared to stay in the new home for several years. Unless you are paying cash or putting more than 20% down it is a good idea to plan on five years in a home you buy under these market conditions.  

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