A Letter From Your Agent
Ilyssa and I just completed a two-day training seminar called MEGA Camp, where Gary Keller, Keller Williams’ founder and CEO, hosts this event at the end of each summer for all of the top agents at Keller Williams. Over the last ten years, Gary has been consistently voted one of the Top 3 most influential people in Residential Real Estate. He always starts the seminar with an analysis of the market, what is happening, and what he expects will happen over the next 24 months. In addition, he provided us with some great information that I want to ensure you have as you consider your Real Estate goals.
He began the conference with the information that the market is in a correction and prices have been dropping since the Feds raised interest rates in May. High prices and higher interest rates affecting affordability have also caused the number of sold transactions to go down.
Last year we set a record for the number of homes sold at 6.1 million units nationwide. We are currently on pace to sell 4.8 million in 2022, a 20% decrease in sales volume. He expects we’ll hit 4.1 million before sales start to tick up. These are still good numbers; however, we did get spoiled by the last two years.
I want to take a moment to deep dive into what happened since 2020, aka when COVID shook up the world of Real Estate, and how this shifted the psychological minds of Sellers and Buyers. COVID forced people to look at their living conditions honestly, and as a result, we saw an influx of people desperate to change their living environments. Either they were living in high-rise buildings, needed outdoor space, or in many cases, jobs shifted entirely to being remote, allowing people to live in neighborhoods they never considered. In Los Angeles, crime was increasing, the homeless situation was worsening, and it caused buyers to migrate into the West Valley and Conejo Valley for a better quality of life. Combine all this with record low interest rates (under 3%), creating the ultimate seller’s market. The Real Estate market functions on the basic economic model of supply and demand. As an influx of buyers was swarming these sought-out areas, we didn’t have the inventory to house everyone causing home prices to hit record highs.
Now, let’s look at what this meant for buyers. Imagine you are living in a high-rise apartment with no outdoor space. You and your partner are working from home, want to start a family, and know being stuck in 750 sqft will not cut it. You hear interest rates are 3% or lower, and you are ready to purchase your first home. You go out shopping and are so excited to buy! Your agent says she can’t get you into the first two houses because all the showing times are taken. Okay… that sucks, but it will be okay because your agent was able to book an appointment for the house you truly want! You go that weekend, and you’re given a 15 minute time slot, which seems like such little time in a place that you potentially will call home, but okay, you understand the new COVID rules, you’re still optimistic. You realize 15 minutes is plenty of time because you and your partner know this is the one! You submit an offer and are instantly told that to compete, you need to be $50,000 above asking, and it most likely will go for $75,000-$100,000 over asking. Welp! That won’t work; this was already the height of your budget. It’s okay, next weekend you will go out again!
Now, imagine this happening over and over again. At some point, you learn that you should be looking at homes priced at $50,0000 below your maximum budget because the asking price is the starting price. You also understand that if you love the house, you need to book the appointment asap and submit a strong offer immediately, with no delay. Every buyer during this time was learning the same lessons, disappointment after disappointment, and started to compete against other frustrated buyers and bid these houses up to record high prices. We saw homes that were fully move-in ready selling for similar prices to those that needed $150,000 worth of work. Buyers were justifying that they just needed a home and would build their equity and make improvements over time. Plus, with the prices increasing at their rates, they were already picking equity up the minute they closed escrow.
I say this story for you to truly get into the mind of buyers, which is necessary as buyers purchase sellers’ homes. As this was becoming the daily reality for buyers, sellers held the commodity and could dictate the rules, resulting in a robust seller’s market. We saw sellers doing crazy things, like forcing buyers to waive ALL contingencies, even physical ones! [Ask us why this hurts a seller the most] Seller’s called the shots for the last 2.5 years; however, once The Feds raised the rates in May, this changed the game. Buyers paused and started realizing that prices would soon begin to come down. If they didn’t have an immediate need to move, they began to wait for prices to come down and offset the increased interest rates. As the prices started to slow down, sellers saw this as their last chance to maximize the high prices and started to rush to list their homes. As a result, we now see more active homes than those in escrow, a very different ratio than we saw in the last 2.5 years. With more options on the market, buyers now know they have time to be more selective. They were no longer willing to pay high prices for homes that required a lot of work. We call it a “Shifting Market” because the change doesn’t happen in one night. As you can see, the buyers’ and sellers’ psychological mindset has been conditioned to view the market, aka pricing, in a particular way. When you change one of those factors, such as interest rates, a shift is created in the formula.
We also need to understand that major news channels report that the market is still rising since they only look at year/year sales. If we look at prices from June/July/August in 2021, home prices are up 5-7%. When the Feds raised the interest rates in May, causing the market to pause, the market came down 10-15%. The other factor which clouds current market trends is Zillow and Redfin estimates. They use closed sales in your area and are usually 2-3 months behind current market pricing. Since 2-3 months ago puts us at the height of the market, we need to be cautious when relying on these estimates to dictate our asking price. Gary stated it is essential that sellers who are selling right now do not look at the market’s prices from the first two quarters of this year but rather at prices from last summer. That is a much better reflection of where the market is headed. He believes the market will continue to go down over the next 18-24 months. It could fall another 15-20% from its current value today, not its peak in April and May.
He then showed us a chart showing the history of prices. Typically when the market goes through an economic slowdown, it takes seven years for property values to return to their previous highs. When the market peaked in 2006, the prices took over ten years to get back to those levels. If you are thinking of selling, the questions you have to consider right now are: do I want to sell your home while prices are still high or chase the market down over the next two years? Do I want to wait 7-10 years for the market to reach these high levels? Getting clarity on these answers will allow us to protect your equity and guide you into the outcome you want. Gary is hesitant to believe that we will see interest rates under 3.4-4% in our lifetime, as the COVID market Bubble led them. He thinks we will see interest rates closer to the historical level of 6- 7%. To current buyers, these are “high” interest rates causing some buyers to sit on the sidelines with unrealistic hopes of them coming down. The COVID bubble of Real Estate is ending, and we need to look at prices from a “normal market” perspective. Prices will return to those levels or lower before we see the market recover.
So where do we go? What does this all mean for you? As your Real Estate professionals, it is our job to educate you with facts and reality because our main objective is to protect your equity. My intention is not to be an alarmist or cause fear but to truly guide you as you make important decisions for yourself and your future. The market has shifted, and now it’s imperative to look at your Real Estate goals. If you are thinking you might want or need to sell in the next year, let’s chat about what that truly will look like for you and your equity. If you are thinking of purchasing, let’s chat now and discuss what your options are what the benefits of owning vs renting truly are.
This new market requires us to revaluated our wants, needs, and ultimate goals of building wealth! So give us a call today so we can discuss your specific situation and get you on track to meet your ultimate goals!
Mark and Ilyssa Moskowitz
Trends to Watch in a Shifting Market
Interest rates determine the affordability of a home. Feds raising the interest rates in May put a pause in the market. Higher interest rates usually affect the entry-level market the most as they won’t have as many extra reserves to purchase a home and pay for any repairs or remodeling it might need.
One of the leading signs of a shifting market is when we start to see more price reductions each week. As you’re browsing online, start to pay attention to how many price reductions there are. If you are a seller, this is important information on your listing price. If you are a buyer this is important as you are submitting offers and where to start at.
Homes Falling out of Escrow
The days when the sellers made all the demands and the buyers had to accept anything are coming to an end. In a normal market, it is a more balanced trade-off. Sellers need to be realistic that there are more options for buyers and the chances of them walking are much higher. Buyers need to be realistic that homes are sold “as is.” Meaning, that when presenting your offer, make sure your offer price is something you are comfortable with, with or without concessions.
Days on Market
Pay attention to the days on the market. Why are some homes sitting while others are going straight into escrow? As a seller, ask yourself how your home compares to the homes selling vs. those sitting. Do you have similar upgrades? Do you have similar features, like a special view? This will affect your asking price. As a buyer, notice which homes are flying off the market. Are those the homes you’re looking for? If yes, then you will still need to be fast and aggressive to compete this shifting market.