Summer Slowdown

The shift in housing due to higher rates has already made a significant impact on the housing market, and it will slow further over the summer.

Housing Will Continue to Cool

Since demand’s early peak at the end of March, the Expected Market Time has jumped from 20 to 45 days, growing by more than 3-weeks.

 

Road trip!! Living in California, it is of no surprise that so many families climb into their SUVs, packed to the gills with luggage, and explore the Golden State. After traveling 70-plus miles per hour for hours without a break, there comes a point where it is time to get off at the next exit, fuel up, and stretch the legs. Upon exiting the freeway and driving to the gas station at a much-reduced speed, it seems as if the car is barely moving. Of course, it is still progressing down the road, but everyone has become accustomed to the much faster speed.

 

That is precisely how it has felt to participate in the housing market in 2022. The market had been zooming along for the past couple of years at an insanely, swift, unprecedented pace. It was as if the gas pedal was permanently fastened to the floorboard. There were very few homes available to purchase, demand was through the roof compliments of historically low mortgage rates, homes would last only days on the market, swarms of buyers toured every home, each offer to purchase competed against a slew of additional offers, sales prices soared above their asking prices, and home values rocketed higher. But, with higher mortgage rates, the market has slowed considerably, and this summer it will feel as if housing is barely moving. Yet, it will still be a Seller’s Market, just not what everyone has become accustomed to.

 

With a higher-than-expected Consumer Price Index report that just came out last week, according to Mortgage News Daily mortgage rates lept from 5.5% on Thursday, June 9th, to 6.13% on Monday, June 13th, an enormous, extraordinary jump. They were at 3.25% at the start of the year and have escalated by nearly 3 points since. The higher rates have already had an enormous impact on housing so far this year, and the recent rise will only further slow the market. Rates are rising in anticipation of everything that the Federal Reserve will need to do in order to tamp down stubborn inflation. 

Higher rates dampen demand, homes take longer to sell, and market times grow longer. Today’s demand is muted compared to last year, down 26%, and the 3-year average prior to COVID (2017 to 2019), down 18%. Fewer buyers qualify to purchase at today’s higher rates, so there are not as many buyers bumping into each other. As a result, the inventory has nearly doubled so far in 2022, growing from 4,432 homes to start the year to 8,556 today. The Expected Market Time (the amount of time between hammering in the FOR-SALE sign to opening escrow) has blossomed from 30-days in March to 53-days today,

 

A Hot Seller’s Market (less than 60-days), just not an insane, instantaneous pace. Many homeowners are not finding success. Incredibly, 43% of all current active listings have been exposed to the market for at least one month. Sitting on the market for over 30 days is to be expected in the luxury ranges, yet there are plenty of sellers having trouble selling in the lower ranges as well. Between 37% to 40% of all homes priced below $2 million have been listed FOR SALE for more than 30-days and are still waiting for the right buyer to bring an acceptable offer to purchase. Not as many sellers have been on the market for more than two months, only 20%, but that will change as housing continues to slow over the coming summer months.

On top of rising rates, the distractions of summer will impact the housing market as well. The busiest time of the year in terms of demand, the Spring Market, is now in the rearview mirror with the conclusion of the school year and graduations. Summer is when active buyers are pulled away from the exhausting pace of housing. Kids are home and parents are busy carpooling to camps, water parks, pools, beaches, and friends’ houses. Thus, demand decreases slightly and there are fewer new escrows opened. With demand dropping, the supply of available homes rises as more homeowners place their homes on the market. Many often mistake the Summer Market as the best time of the year to sell a home. In terms of new escrow activity, it is second to the Spring Market. With an increasing supply and falling demand, the Expected Market Time increases.

 Combine the slightly slower Summer Market with the current rising mortgage rate environment and demand will continue to slowly cool over the next several months. The inventory will rise on the backs of homes that are overpriced, in poor condition, or have an inferior location. Carefully arriving at the price is crucial for sellers to secure a successful outcome. Homes that are priced according to their Fair Market Value will generate offers to purchase. Homeowners who stretch the asking price will waste valuable market time and will need to reduce to sell. In fact, 26% of all available homes in Los Angeles County have reduced the asking price at least once.

Attention Sellers: Sharpen your pencils, scrutinize all comparable data, and price your home so that it will sell. Do not learn the hard way that this market is not the same as the frenzied market of the past two years.

 

Attention Buyers: There are finally more choices, but if a home is priced well, it will not last. Do not mistake a slower market for a Buyer’s Market. It is still a Seller’s Market. Buyers looking to negotiate should consider homes that have been on the market for a while and are having trouble securing a buyer willing to make an offer to purchase. 

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