When will it slow?

When Will it Slow?

Housing has only grown hotter despite mortgage rates rising considerably since ringing in a New Year, indicating it will take further changes for the market to slow.

Market Shifts

If mortgage rates rise above 4% and remain elevated with staying power, then housing will finally slow a bit, shifting from an Insane Seller’s Market to a regular Hot Seller’s Market with longer market times.

Today’s society is accustomed to getting information immediately and from a variety of different sources. Nobody really has to wait for the 5:00 newscast or the morning paper to get the latest news. Everything now can be found on the web and on a smartphone in an instant. The Wall Street Journal, CNBC, MSNBC, FOX, CNN, CBS, ABC, BBC, and the countless millions of other websites allow everyone to be plugged into all the constant world changes. It is reported live 24 hours a day, seven days a week. When a bad earnings report for a company is announced… BOOM! The company stock drops in an instant. The Consumer Price Index (inflation) rises a lot higher than estimates… BOOM! The DOW, S&P 500, and NADAQ all plummet immediately. Yet, changes in the housing market are far from instant.

The transformation of the housing market occurs over time. It just does not change in the snap of a finger. Houses are not traded on Wall Street. They are not stocks that are easily bought and sold. Instead, they are homes, a place to rest, relax, and unwind, a place to start or raise a family. Everyone needs shelter and must live somewhere. It is understandable that in tracking housing, new trends slowly shift the tide and eventually reveal a change in the housing market.

A new trend has emerged this year, rising rates. According to Freddie Mac’s Primary Mortgage Market Survey®, 30-year fixed rates have risen from 3.05% on December 23rd to 3.92% on February 17th, nearly a full percent higher in only 8-short weeks. Yet, the market remains insanely, white hot. In fact, in the past two weeks, the Expected Market Time in So Cal (the time between pounding in the FOR-SALE sign to opening escrow) dropped from 32 to 31 days, the lowest level since tracking began 10 years ago.

The market is growing hotter because that is what occurs during the Winter Market, when the inventory does not change much and demand surges. There are plenty of buyers bumping into each other at open houses and property showings, but there are very few homes currently available and not enough homeowners placing their homes on the market right now. More homes come on during the Spring Market, from mid-March through mid-June. Families prefer to place their home on the market during the spring, open escrow, and then close during the summer when the kids are out of school.

\"\" — *Demand increased by 10% in the past couple of weeks*

The trend in rising rates has occurred before and eventually led to a market change in 2013 when there was a very limited supply of available homes to purchase as well. Similar to today, the Expected Market Time dropped, and the market got hotter at the beginning of the year. It declined from 53 days in January to 39 days by the end of March. At the same time, mortgage rates rose from 3.34% to 3.63%, yet the market just got hotter. But, as more homeowners came on the market during the spring, the number of available homes began to rise substantially for the first time in nearly two years, growing from 7,717 in March to 9,825 by mid-June, adding 2,108 homes, up 27%. At the same time, mortgage rates had climbed to 3.93%. The inventory continued to grow through the Summer and Autumn Markets and did not peak until the end of October at 12,964 homes. A typical peak occurs during the summer between July and August. From March to October the number of available homes had soared from 7,717 to 12,964, rising by 67% by adding 5,247 homes. The Expected Market Time slowed from 39 to 81 days, and mortgage rates had surpassed 4.5% in September before retreating to 4.23% in October.

The fundamental trend of persistent rising rates from 3.34% at the start of 2013 to 4.5% in September, paved the way to a shift in the market from an Insanely Hot Seller’s Market to a Slight Seller’s Market. Demand downshifted due to enduring climbing rates. With a bit less demand, overpriced listings sat on the market and accumulated over time, allowing for the inventory of available homes to rise. With a rising supply and muted demand, the overall speed of the market slowed, and Expected Market Times climbed.

For the market in 2022 to experience a similar shift. Mortgage rates cannot substantially drop from here. They must persist at these higher levels, between 3.75% and 4%, and then eventually climb above 4% with staying power. If that occurs, as more homes come on the market during the spring and summer, demand will be muted, and the inventory will substantially climb for the first time in 3-years. Higher rates must endure for that to occur.

Last year mortgage rates started the year at 2.65% and had climbed to 3.18% by April 1st, up a little over a half a percent. The rise was short lived as mortgage rates dropped back down to 3% by the end of April, and to 2.77% in August. Rising rates did not persist and the Insanely Hot Seller’s Market could not be stopped.

The Los Angeles County housing market has been below 50-days since January 2021. At these levels there are a ton of showings, sellers get to call all the shots during the negotiating process, multiple offers are the norm, and home values are rising rapidly. At this point, only higher rates can slow the housing freight train that has been barreling down the tracks for nearly two years.