Housing is in undersupply, not over demand

Vancouver and Clark County are definitely experiencing a solid and reasonable level of demand for housing, but that demand is not high enough to warrant the highly accelerated pricing growth. It is definitely a supply issue and sellers that want to move are holding off in many cases because they are concerned about finding a place to move after they sell.

Most of the listings I take are people moving out of the area or people already in contract to buy a house and they don't need to sell the current house to buy the new one. There are just not that many people in those situations to provide enough listings for even a moderate number of buyers. As if that alone were not enough. the new home market is bottlenecked with the same supply chain issues other industries are facing and they are running nearly a year out on construction.

A large part of resale home pricing is either tempered or bolstered by new home pricing. In an inflationary cycle the price pressure on new homes can be intense and sellers often get a coattails boost in resale value. We are certainly seeing that scenario play out right here at home. 

We may see a softening in demand at least in the lower half of the market as interest rates rise and start eliminating buyers from qualifying. Right now the rising rates are effecting boosting demand a little as 'fence sitters' are jumping in to try and lock in a respectable rate. That will trail off dramatically over the next few months if rates continue the upward trend.

As I have mentioned over the years ad nauseam, rates are still low and any rate under 6% is a historically good rate. However the booming real estate market over the last five years has been largely boosted by historically low interest rates. People in lower middle income brackets that could not buy a home in the mid 2000's could buy one from 2011-2017 due largely to the after effects of the Great Recession. Home prices were super low and interest rates were in the basement as well. That combination produced record setting home sales for years. Now many of those who bought that $130,000 house in 2012 are sitting on a mountain of equity and that drives some to use it to upgrade.

I am mildly bullish on 2022 real estate but trending with the bear for 2023. We will see how it all plays out. Keep your eyes on the lending rates. I feel like the target rate for a slowdown in pricing is near 6% which will wipe out a lot of people with a household income under $100k.  

Housing Market Holding up Against Rising Rates

Rising interest rates continue to plague buyers, particularly those in the entry level price ranges. Higher rates erode buying power for those using a loan to purchase. As rates approach five percent I like to remind everyone that these are still quite a bit lower than the fifty year average so we are not into a "high interest" market just yet. It seems to show as prices on new listings are still strong and homes are still selling in a matter of days. Inventory levels locally are at all time lows. This means fewer properties are available and even as buyers are priced out in the rising rate economy, there are still too few listings to choose from.

Buyers still need to be ready to compete with other buyers in a multi-offer environment. At this point waiting for a market slowdown could end up costing buyers more money. I have written a great deal about the effects of interest versus the effects of price. Even if the local prices were to drop 5-10% over the next year, the people that bought last year at 3% are in better shape than those that buy at 10% less price a year later at 5.5%. More importantly is the timeframe of ownership. Most people will stay in that house for 5 years and if pricing does enter a decline then that might be extended longer. The higher interest rate chews away at your equity position faster than the lower rate.

Barring a total collapse in housing like we had back in 2009-2011 it is better to buy now with rates low then to wait until rates are actually high. A high interest rate market would have rates well above 6% but I don't think we should see the double digit rates we had back in the 1970s and early 80s. The Fed has adopted a much better model for managing inflation money squeezes than we had 40 years ago.

If you are on the financing bubble, find a house fast, write an offer, and get situated before you are locked into another decade of making your landlord rich.

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.