Friday, November 10, 2023

Will this Winter Season, Bring a Return to Neutrality?

I have been writing about the strange market conditions over the last year now where we have a combination of low demand and low supply. This has led to a massive slowdown in the sales of homes, but not a massive slide in prices. The market correction many have suggested is eminent, is currently being stayed due to a lack of inventory. Inventory however, has been slowly creeping up. As of the close of October local inventory levels are at 2.8 months. This is still an indicator of a mild sellers market, but it doesn't feel like a sellers market, it feels neutral. The old school rule of thought is that six months of inventory is a neutral market, anything less favors sellers, anything more favors buyers. 

This market is starting to feel neutral. We are still well into sellers market inventory and that is what makes these conditions seem weird. The recent run up on interest rates seems to have the remaining qualified buyers much more cautious. I have noticed that Millennials in general have been a more cautious group of buyers than their predecessors in Gen X and Boomers. Those two previous generations had a tendency to borrow as much as the bank would allow whereas Millennials have shown a tendency to be more conservative and not rush to borrow every last cent. 

So I think that is playing a role in having sellers market inventory levels yet neutral feeling conditions. As a Realtor® I certainly would prefer buyers borrowing every last cent, right? But it is also very comforting to see younger people using money wisely. Price pressure right now is downward at a time it should still be rising. The local median has been close to flat over the last twelve months. Sellers need to price their home competitively and the notion of floating a higher price for the first few weeks is no longer a winning strategy. Sellers need to be competitive from day one.

Buyers meanwhile should understand that interest rates have averaged in the mid-6s over the last 50 years. We had all time high interest rates back in the late seventies and early eighties and then after the 2009 crash, rates plummeted to all time lows. It is always a difficult adjustment coming from super low rates into more average and now slightly higher than average rates. I am confident that we are unlikely to see rates reach the horrific levels of 45 years ago, but they could creep up a little more before they start coming down. I would not expect to see another long term period of sub five percent rates anytime soon. 

Buyers obtaining a mortgage loan in the upper 7s to low 8s will likely have a refinance option in the low 6s at some point over the next five years. Of course life offers no guarantees, it is not an unreasonable assumption that we will see a softening in interest rates in the next several years. 

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