The local MLS reported tighter inventory levels and usually that means rising prices. But prices are not rising, at least not much. Why is that? Keeping with classic economics of supply and demand we continue to have a short supply of homes but also a short supply of buyers. So supply is tight but demand is low. Yes folks demand is low, but we all know that demand isn't really low, right? of course we do, so what gives? Demand is being suppressed with higher interest rates that have eliminated many buyers from making moves after an extended period of ridiculously low rates. Homeowners that are sitting on mortgages with the lowest rates in the history of 30 year loans are hesitant to sell. Remember that a very large percentage of real estate demand comes from people selling their current home and moving into another home.
What's really driving the demand side now is almost exclusively entry level first time buyers and relocations. We are not seeing a lot of move-up demand. Move-up is when a homeowner wants to sell their home and buy a larger or superior home. That market has been reduced to a crawl because those potential move-up buyers are sitting on a 2.5-3% mortgage and if they move-up their new mortgage will be 6.5-7%. It makes it less affordable and it's psychologically hard to swallow.
So we have a compressed market with fewer sales but it's acting like a roaring market with multiple offers on well priced homes. It's a bit of a mirage actually. The good news is that instead of crashing the market, these higher rates have managed to simply slow it down a bit and after a period of adjustment we should return to more normal demand levels.
Here's to a great second half of 2023.
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