Real Estate Market Update: Rates Rise, Values Slip

Rates Rise, Values Slip

As rates surge higher and affordability diminishes even more, smaller changes in market times shift the market in the buyer’s favor.

Higher Rates Squeeze the Market

An Expected Market Time of 60 days is considered a Balanced Market today, yet that level used to be a Hot Seller’s Market prior to the run-up in mortgage rates that began in January 2022.

Gasoline prices can undoubtedly fluctuate quite a bit. This year in California, prices ballooned from $4.25 in January to $5.90 at the beginning of this month. From August to October, gas climbed by $1. These quick shifts in prices squeeze wallets and change the way consumers behave. Some will wait up to 25 minutes at Costco to fill up and save. Others will eat out less or run fewer daily errands. As gas prices climb, people drive less, and demand for fuel drops.

Similarly, mortgage rates have been much more volatile and have jumped all over the place this year. According to Mortgage News Daily, rates bounced from 5.99% on February 2^nd to 7.1% on March 2^nd. They then dropped back to 6.18% on April 6^th until they jumped to 7.14% on May 26^th. Recently, rates surged from 7.08% on September 1^st to 7.8% today. This rapid evolution in rates can quickly disrupt the housing scene. Buyers behave differently as budgets are squeezed and are less willing to stretch regardless of low inventory levels.

Supply and demand, the good old Econ 101 principle, illustrates that as prices increase, supply rises while demand declines. As prices drop, supply shrinks while demand grows. From supply and demand levels, it can be determined when the market favors sellers or buyers. A balanced market, equilibrium, does not favor a buyer or seller.

As rates ballooned from 3.25% in January 2022 to 7.37% in October 2022, an unprecedented, swift climb, the Expected Market Time rose from 19 days in March to 87 days in October. Before skyrocketing mortgage rates, 87 days would have been considered a Slight Seller’s Market. Yet, home values in Orange County were falling. They peaked in May 2022 and dropped from June until they bottomed in December, seven straight months of declines. Yet, with a minimal inventory, the Expected Market Time never reached what previously was considered a Buyer’s Market. Then why did values drop?

Home values dropped in the second half of 2022 due to the rapid deterioration in home affordability. Many buyers were quickly priced out of the house-hunting game. They could no longer afford to purchase. As a result, demand dropped to levels last seen during the Great Recession. Yet, back then, the low demand was matched up against a glut of available homes, more than five times 2022 supply levels, and the Expected Market Time soared to record heights, over 400 days. In 2022, supply and demand were not just a function of price; a new variable, sky-high rates impacted them.

Today’s demand levels (snapshot of the number of new pending sales over the prior month) are less than last year, with 1,335 pending sales compared to 1,427, 6% less. Yet, they are matched against inventory levels significantly less than last year, with 2,408 available homes versus 3,656, 34% fewer. The Expected Market Time has been rising since hitting a low of 37 days at the end of April and is 54 days today. A 54-day Expected Market Time would have been considered a Hot Seller’s Market before the high mortgage rate environment, but not today. Today, it is balanced.

Mortgage rates have been stuck above 7% since the end of July as the financial markets now believe that the Federal Reserve will keep rates “higher for longer.” Since the Federal Reserve met last month and confirmed that they will keep the short-term rate higher for longer than previously anticipated, rates have climbed from 7.33% to 7.8% today, levels last seen in November 2000.

The Orange County housing market is strikingly different now that rates have shifted towards 8%, squeezing home affordability further and, in many markets, starting to favor buyers.