Shift Happens

10 Signs of a Market in Transition

By MICHAEL EDLEN | Special to the Palisadian-Post

Typically the housing market goes through major up and down cycles about every eight to 10 years. The last big shift began in 2008 and recovery started in 2013. We anticipated the next market correction around 2018 to 2019.

As we know, that did not occur, primarily due to the government taking effective measures to keep interest rates at increasingly lower levels to stimulate the economy. As the cost of money became less and less, more and more people were able to afford homes that would have been too costly even a couple of years earlier. The increased demand for housing was even greater due to the millennial generation maturing into a point of being able to save enough money for a down payment and purchase a starter home.

The market challenges were compounded by a gradual lessening of sufficient supply of homes available to purchase, which added even more upward pressure on prices well beyond 2018. This shortage of available inventory was largely due to fewer owners being willing to sell their homes than would have in previous years, both to avoid paying high capital gains taxes as well as due to having no better alternatives in mind to move to than where they had been living for many years.

In addition to that, builders were constrained by a lack of sufficient vacant land or tear-down homes, which would otherwise have become new homes to meet the steadily growing demand.

As with all cycles, eventually things stop moving in the same direction, and then are seen to have begun a shift in the other direction. I believe that such may be the case beginning this summer.

Even though all statistical reports coming out still indicate this is a strong seller’s market, and it will take a substantially greater inventory of homes for sale before the market will be in balance between buyers and sellers, there is a definite feeling below the surface that a shift may well be beginning.

What are some signs that this may be the situation?

• Fewer people attending open houses in the last few weeks.
• Fewer multiple offers when a listing is priced just at the theoretical market value.
• Buyers being less willing to waive some contingencies and more demanding of the sellers after doing their inspections.
• Lenders reporting fewer loan applications being made.
• Investors being less willing to outbid others to secure their next project site.
• More escrows being cancelled for a variety of reasons, including more “buyer’s remorse.”
• More listings showing price reductions.
• More listings expiring or being withdrawn from the market.
• An increase in the length of time it is taking to get into escrow.
• More articles in the media about the market changing.
• The actual cost of home ownership has increased tremendously in the last six months. Buyers were able to purchase homes with a cost of money as low as 3% earlier this year. Today’s rates are at 5% or more.

Considering that the majority of homes are purchased using a loan of 70 to 80%, this increase in interest rates has effectively increased the monthly payments between 30 to 60%. It is understandable, therefore, that the market eventually had to begin slowing down, as it has since the beginning of June.

One can envision a phase where the market will soon approach being in greater balance between buyers and sellers. This will require inventory to double in size at the same time that the rate of sales might dip by 25 to 50% from where it is as we enter July.

This could gradually, or not so gradually, occur between the end of 2022 and the middle of 2023, depending on a number of factors too numerous to speculate about in this context.

Bottom line for potential buyers may still be the same as it has been for more than a year: Long-term interest rates are relatively much lower than they have averaged over many decades. Even though home prices are much higher than they used to be, the probable continued increase in interest rates might more than offset any lowering in home prices over the next year or more. Buy now if you find the ideal place and are able to afford it.

Bottom line for owners wanting to maximize their equity: With interest rates more likely to increase than decrease in the years to come, you might do well to sell today at whatever the best price is and move on with your next chapter now. Unless you just purchased in the last two years, you have probably made enough profit that you could transfer your equity elsewhere or convert part of it into a second home.

No “crystal ball” is very useful at this time, regarding what the future holds in store for housing values. However, one thing is always true about pendulums: Eventually they swing the other direction.

Michael Edlen is available for free consultations about all things related to real estate. He is one of the few local agents who have been through three major housing cycles. Contact him at 310-600-7422 or michael@edlenteam.com.