WHERE IS THE REAL ESTATE MARKET HEADED?
So, where is this market headed? The big change we will see is a reduction in the rate of increase in pricing and we’re already starting to see it. When you look at the amount people are offering over the asking price, it’s going down.
We are already starting to see more inventory and the more inventory we get the less aggressive buyers have to be in the offers they’re making. We can see that here with this graph showing our rise in inventory and then when we flip over to the next graph we can see that the average purchase price over the list price is now at 2.4% over asking when we were at 4.2% over asking in May, which was our peak.
Inventory levels are still incredibly low, though. We hit our record low in March and April of this year with only .8 months of inventory. This means if no new listings came on the market it would’ve taken less than a month for every house to be purchased based on the current demand. We are now at 1.4 months of inventory. Six months is considered a balanced market. The last time we saw that inventory level was September 2012.
Factors Affecting Interest Rates
Interest rates are driving a lot of the purchase activity as well. When they’re lower, people can afford more of a home. For an average Rockwall homebuyer, an increase in rates of 1% would roughly mean a 7% decrease in buying power. There are different ways to work this number but what I did to get this amount was I set up a generic home buyer profile on an affordability calculator. I assumed a household income of $100,000, monthly debts of $750 and I factored in taxes and insurance.
When I keep all inputs the same and only change the interest rate, I get a decrease of about 1.8% of purchasing power for each quarter of a point I add in the interest rate.
Covid affects rates a bunch. The more cases we have the more people get concerned about the economy. When people are concerned about the economy then interest rates tend to stay low. So if we get over this Delta variant hump and start getting back to normal, that could start a rate increase.
The 10-year treasury yield also factors into interest rates. When the yield declines it means people are concerned about global economic conditions. When this happens, mortgage rates go down as well. The smart people are predicting the 10-year to go up to around 2% and overall mortgage rates to bump up to 3.25% by the end of this year. Right now rates are at 2.87%. Before Covid shut everything down for us (so the end of 2019 and beginning of 2020), rates were under 3.75%. This tells me that if they go up, it won’t be by much.
So, in short, in the future, I think interest rates will be a little higher, prices will stay at the levels that have been set but won’t increase as quickly as they have been, and homes will start to sit on the market a little longer as there will be fewer buyers due to more inventory.
And that’s my answer. Do you have a question about real estate that you want answered? Send me a message or comment here and I’d be happy to answer it!