The Market is Really Slow, but Prices Remain Steady

This market is one I can't remember seeing before. There has literally been a slowdown in sales to about 50% of what they were just two years ago. Generally when the real estate market sees a slowdown that severe it results in a substantial correction in pricing. But that has not happened here. Why not?

Well I have touched on this before but it serves well to bring it up again. When rates rose from the low 5's to the mid 7's in the short span of a few weeks in the summer of 2021, we lost about half of all the buyers that were looking. Normally when demand drops in half prices follow. But this time was different because sellers were not selling either. 

We have a strong job market here in the Portland-Vancouver metro area and people are coming here in higher numbers than are leaving. Sellers have been staying put because they are sitting on a historically low interest rate and either can't financially afford to move or simply do not want to move. So just as the demand fell to half, so did the supply. 

What is left is the same 2000 agents selling half as many houses every month. So you will no doubt hear agents whining about how slow the market is, but in reality it is about the same as it was in late 2021. Prices have been mostly flat and things are just treading water, so to say.

You may see allot of these price reductions happening, but they are mostly from overzealous sellers that have their property overpriced and eventually realize that the market won't support the puffed up vision of their home value. I believe that this unusual dynamic is the only reason we have not seen a major price correction. I fear that the Fed wants a major price correction and will continue to raise rates until they get it.

The Fed is either not run by the smartest people or they are run by people with an agenda that is unfavorable to the middle class. That is brilliantly evident. But they do hold an enormous amount of monetary power. If their intent was to slow the economy on soften housing, they would have got their wish had they raised rates more slowly. Sellers would trade a 2.9% mortgage to buy a new house they like better at 3.5% but asking them to move from 2.9% to 6% or 7% is a tough ask. Baby Boomers and older Gen Xers are in the downsize mode but many of them can't justify exiting a sweet 2.9% rate to buy a smaller less expensive house and pay MORE on the mortgage payment. That doesn't make sense at all. So much of our transactions right now are either cash or super large down deals where the interest rate isn't really that much of a factor.

Let me cite an example. Ms. X bought a 2500 SF 5 bed house in 2002, she refinanced it in 2018 at 2.9% and paid off a home equity line in the process. So now she has a $310,000 loan on a home that was worth $500,000 at the time. Her payment is only $1750 PITI. Fast forward to the fall of 2023. She would like to downsize as she is a classic empty nester and would like to eliminate the stairs in the home. The house is now worth about $625,000 and she owes a little less than $300,000. 

Well she has a large equity position but she can't buy a comparable quality 1500 SF ranch for much less than $500,000. So she needs to put down $275,000 on a $500,000 purchase and has to borrow $225,000 at 7.5% to make the deal go. Her new PITI mortgage payment is $2100. Unless she is physically unable to use the stairs, it is unwise to make this move. Frankly installing a stairlift for $2000-$3000 makes more sense if she has trouble with stairs.

This is the state of the market right now. I must admit, my personal situation looks similar contextually to Ms. X situation. Why give up a nice large home for a smaller one at a higher monthly payment. Hey how about you trade your 2017 Cadillac in on a 2017 Chevy and pay us more 20% more money for it? Uh, no thank you.

Now one solution would be to rent the current house out. Ms. X is paying $1750 for a house she can rent for $3500 a month. That will provide some cash flow that is enough to more than make up the difference in payment on the downsized home, right? Of course now she is looking at a more modest down payment of 3.5% for an FHA loan on a $500,000 house. This payment is going to clock in at around $4000 a month minus the $1750 cash flow from the rental. Wait a minute... That's worse!

The Fed is NOT doing middle class America any favors here. It sure seems like they are in bed with the hyper wealthy and everything they are doing is specifically tailored to make the billionaire class richer. Keep that in mind when you vote each election. The rich and the ruling class have never liked it when the peasants own property :)

How has Buying Power Diminished in the Current Economic Climate?

The real estate market has undoubtedly softened up under the burden of higher interest rates. Locally interest rates for 30 year conventional mortgages are hovering in the low 8s. These are rates we haven't seen since the turn of the 21st Century. Of course old guys like me remember the late 70s and early 80s when mortgage rates were close to 20%! Let's hop the knuckleheads in Washington DC don't let that happen again.

Higher interest rates tend to rob buyers of purchasing power. This his typically the hardest pill to swallow. How much has a buyers purchasing power actually eroded since the October of 2020 when when most borrowers could get a loan in the low 5s. For the sake of easy math I'll compare 2020 prices and 5% mortgage rate to 2023 prices and 8% mortgage rates.

October 2020 the median priced home in Vancouver was about $372,000 and rates at 5% were possible although most people were a tad above that. With 20% down ($74,400) a buyer would borrow $297,600 @ 5% for a principle and interest payment of $1,598. Of course loan payments often include taxes and insurance so the real total payment would be higher but this is a comparison of the loan costs and housing prices. 

October 2023 the median price in Vancouver has been flat over the last year and remains at about $490,000 and rates a bit above 8%. So our buyer has to come up with 20% down ($98,000) and borrows $392,000 @ 8% for a principle and interest payment of $2,876.

That is a striking difference of nearly 90%. But a few other things have happened that at least slow the bleeding a bit. In 2020 the median family income in Clark County, WA was $77,184 today it is estimated at $91,000. Well the cost of buying a house has definitely outstripped the increase in income, but the real world difference is a little closer than just the payment suggests.

October 2020 median family earner buys median priced house and payment is 26% of gross income. October 2023 it is 38%. In order for parity where today's house only costs 26% of gross, current rates would need to be 4.5%. If housing prices remain steady and incomes continue to climb, then by 2027 we would be back where we were in 2020 as far as debt to income ratios are concerned.

I believe the Fed over reached by allowing rates to climb above 8%. A healthy number that would have slowed the economy enough to reduce inflation but not stagnate the real estate market, would have been 7%. Rod for Fed Chair ;) 

Quietly and Slowly Inventory Is Creeping Up

The September 2023 MLS report is out and it shows what we all feel. A shrinking market with stable pricing. Interest rates have chased away a large portion of buyers and they have also led to a large portion of potential sellers to stay put. We have a shrinking inventory and a shrinking pool of buyers. In the traditional economic terms of supply and demand both are shrinking and so we are basically treading water. But rates have pushed up high enough locally that now the ecumenic thumb is on the demand side of the scale.

Despite sellers general unwillingness to depart from their sub 4% interest rate, some still have to sell. Retirement, moving for job, estate sales, divorce, etc. Now these listings are starting to outpace sales and inventory in September reached the highest point in nearly five years. Don't get too excited, though it stands at two and a half months which is still comfortably in the sellers advantage when looking at traditional neutral markets with four to six months of inventory. 

The meat of our local market in Clark County remains the $400-$700k price range where nearly two thirds of last month's transactions fell. A little less than 10% of transactions were above $1 million. Overall closed sales are running at about half what they were 12-18 months ago and one would think that type of slowdown would lead to crashing prices. But those were the days of ten offers in ten minutes. Now we have a market that is settling in to a nice 15-30 day marketing time and less of those multiple offer scenarios. The market is healthier now. We still have fewer houses than buyers so sellers retain a small advantage in this market. But sellers that insist on listing at above market value are finding stiff resistance from buyers. I suspect we will slowly slip into neutral conditions and if the boneheads at the Fed stop raising rates, we may escape this without a severe market correction. 

It remains for now that our local market is slow and steady, but most importantly, stable.