The Expert Podcast

Neither buyers nor sellers are going to be happy about what's happening with the real estate market. If you're a buyer that's been on the fence waiting for real estate prices to go down, obviously you're not seeing that happen and most experts say it's not going to happen. We'll get into the reasons why, but also sellers, you're not going to be happy either because the ability to sell a home in this market is also going to be more difficult. Nobody in the real estate industry is going to like the next 24 to 36 months because if you're a mortgage broker you're not going to be happy either because you're going to be doing much less in terms of business almost down to zero. If you're a realtor selling homes you also are going to see your sales volume and your commissions reduced dramatically. Anything in the real estate industry has a lot of headwinds.

Let's take a look at why. First of all, here's an article from MarketWatch talking about that there's weakness in the housing market. Now when you hear weakness in the housing market, if you're a buyer you might think hey that's great, home prices will go down, maybe I can get a deal, maybe all this spike in balloon bubble of house price is going to go away, it'll go back to what's called normal. It's one of the questions we get a lot: is when is the housing market going to go back to normal? When are home prices kind of go back to normal?

And sure, it says right here buyers are officially spooked by rising interest rates. Now think about that. For the last two years home prices went up and until interest rates spiked nobody was spooked about the home prices, even when homes were two or three or four hundred thousand higher than they were a year or two before. There was still a line out the door of that house to buy the house. Homes that were 40, 50, 60 percent higher than they were a year ago had multiple offers, 15, 20 offers. Sometimes the offers came in tens or hundreds of thousands above the asking price. So the price is not what spooked buyers because that has been there for a while. Interest rates are spooking buyers because it affects the mortgage payment that you have, and interest rates sometimes is psychologically more impactful to a buyer than the selling price.

But it's not going to lower the home price level and here's why: there still is an inventory problem and the inventory problem is going to get worse. Yes, there will be more people who are potential sellers that thought about selling for the last year, year and a half, two years and maybe held back because they saw prices going up and they figured let me wait a little while longer and I'll get even more for my house. Now some of those sellers are coming out into the woodwork because there is some fear that the home values will deteriorate, it will go down, so more houses are coming into the market from that component of the people.

The problem is normal sellers who want to move from one house to another are now locked in because if you have a mortgage that's two or three percent interest and now you're facing almost six to buy a new house, you're probably going to stay put. Because even if you do want that new house and you can get a lot of money for your current property, you're not going to be able to make up the difference on interest rate on your payment. So a lot of buyers are going to stay put and for that reason many experts say don't expect a real estate crash.

Here's why: buyers are saying they're pushing off plans to purchase by six to 12 months. So if you're a buyer you're probably thinking the same thing: wait a minute, let's see what happens with this market, let's see if it goes down a little bit, let's see what happens with interest rates. Interest rates went up, maybe they'll stop going up, maybe they'll go down, maybe I'll get more income. All of these factors are conspiring against everybody who has an interest in real estate.

If you are a seller, you're not going to have as many buyers out there because they're kind of fading into the woodwork because of interest rates. At the same time you will probably have more competition of houses on the market. So that selling price that you are thinking about getting based on your neighbors selling their house, based on Zillow, based on anything else, you can put it out there for that selling price but it may take a while for the transaction to happen. Homes are sitting on the market longer than they were, but and this is huge, the prices are not going down.

Now there may be some price reductions on asking prices or listing prices but those reductions are from an inflated higher value, not from like a 2019 or 2020 price. In fact, the prices that are being asked even after the reduction is still much higher than they were a year ago, 2021, even the beginning of this year. So there's a perfect storm of supply and demand where supply is going away because people can't sell their house because they have a low mortgage rate and going into a new house is just gonna get them into a higher rate on their mortgage.

You can't move your mortgage with you. If you have a two and a half percent mortgage, you can't move that over to your new house. Your new house is going to have a five and a half or six percent mortgage. So the inventory is going to go down, the same time the number of buyers is also going to go down because of the interest rate being higher and the house prices have gone up. So what that's going to do, the volume of sales will diminish tremendously. The sales volume you'll see that reported on the news, real estate sales are down, but that just means that the number of homes being sold is lower. It doesn't necessarily mean the price is lower and that's what you have to look at.

Realtors are going to have a tough time doing the kind of volume that they did for the last two to three years because there were multiple offers on houses, 10, 15, 20 offers. Now here's another reason that the prices also are not going to go down: those 10 or 15 or 20 people that bid on houses in December, January, February of the last year, they're still out there. Most of them didn't buy a house. Only one of those 15 people got the house. If there were 15 bids on a house, only one of them got the house, 14 did not get the house. So those people are still lurking, they're still out there in the marketplace.

So inventory will be absorbed at a lower level but the price point won't go down because as soon as there's any house that's in the market that's reasonable, the house is going to get sold. So the price won't retreat. It may not go up as fast but gradually as buyers start to see okay that's the price point, it's not going down, I can calculate the mortgage on this interest rate, the home transactions will continue. It's not going to crash like it did in 2008. It will stay at a reduced level but every house that's available eventually will get sold. There may be a more traditional turn rate, 40, 50, 60 day inventory rather than two-week inventory, but the homes will all get sold.

A house that's decent enough to live in is going to get taken off the market. Somebody's going to buy that house eventually. You're not going to have to discount it back to 2019, 2020 prices. It may not go up to another 10 or 15 percent increase like it did last year, but that price level is kind of ratcheted in and then the balance of supply and demand will kick in and buyers and sellers will meet in the middle.

Let us know what you think in the comments. Tell us about your experience looking at houses. If you're a mortgage broker, what are you seeing for volume? Most of what we hear is that the volume is way off. It's already 30, 40 percent off. Some places are half the volume it was. We expect by the end of the year it'll be less than half of what it was in 2020.