The HOT Real Estate Market just took a turn in May of 2022
Did you feel that? What was that? Our weather in Colorado is not the only thing that changes fast. Our housing market has shifted so quickly, that the world we lived in just weeks ago seems to be in the rearview mirror. The intense environment we witnessed with limited supply and demand issues, has disappeared like a spring snow in the sun. Almost in the blink of an eye. For sellers, the expectations of having so many showings that it makes your head spin, receiving multiple offers, and buyers offering what it will take to obtain a home, they were outbid time after time, while trying to be creative and flexible, and comfortable with their decision, while retaining their financial assets for costs of the new home, has stagnated due to many factors. Let’s take a glimpse as to why this shift has happened so fast.
1- Increase in Interest Rates
Mortgage rates have increased multiple points since the beginning of the year. This has made borrowing money more expensive and the buyers that were approved for say $840,000 in March or April, may now only be able to purchase a $760,000 home, with the increased payment. Our purchasing power reduces as rates increase.
When the FOMC announced that they would start scaling back their purchases of Mortgage-Backed Securities to reduce their balance sheet of assets they held, it spooked the markets with the pace of that tapering they instilled and when they would begin, and the increase of that reduction would lead to higher rates, and that became evident. Starting this month, The Fed will start the reduction of their Balance Sheet by $47.5 Billion. The last time the Feds tapered their balance sheet, through a tightening cycle, they waited 2 years. This time they did not want to wait that long. What is maddening is that they decided to reduce the balance sheet very rapidly and as we all know, mortgage rates have increased very quickly.
2- Increase in Inventory for the first time since June of 2019
We've had discussions with our friends, family, and of course clients that it seems like there are more homes on the market, reducing the supply and demand issues for homes. The statistics absolutely support that! In Boulder County for all listings (Single Family and Townhome/Condos), there were 300 new listings in January of 2021. In May of 2021, there were 692 new listings that hit the market. That is an increase of 130% of homes that came on the market in 4 months. As we all saw with the supply chain disruption issues this past year, when you have less of a product, the price is higher. Now that we are seeing more homes on the market, that is creating more opportunities for buyers and offering them a chance to find the home that checks more boxes for them, in the new home they want, without a HUGE pressure. When buyers have more homes to look at, you may see 10 buyers look at a certain home instead of 50. And of course, higher price point homes have a smaller pool of buyers to begin with, now have an even smaller pool, with more home competition and with the increase of rates, the amount of buyers that are able to purchase that home with financing, has dwindled. As always, if cash is involved in the purchase, that is beneficial for sellers.
3- Market Correction of Stock Market
As we have all seen, the Stock Market has seen its first real (Non-Covid) correction in 13 years. When the market loses asset values, people seem to hold off on large purchases (like possibly a new home). The main factor cited by investors and analysts for the market's weakness is the policy change at the Federal Reserve. As the pandemic took hold, the U.S. central bank put in place emergency policies to stabilize the economy that investors say also emboldened buying of stocks and other riskier assets. But the Fed early in 2022 signaled it was pivoting to tighter monetary policy in order to tamp down surging inflation, a significant change to the investing environment. In March, the Feds raised interest rates for the first time since 2018, boosting them by 25 basis points. Earlier this month, the central bank raised rates by another 50 basis points - the biggest move in 22 years - and Fed Chair Jerome Powell signaled similar increases could follow as it also starts unwinding assets accumulated during its fight against the pandemic's effects. The decisions have weighed on stocks in several ways. While equities have risen during many of the Fed's past rate-raising cycles, some investors worry that surging inflation and sky-high commodity prices could force the central bank to tighten more aggressively, potentially hurting growth. -Reuters
As of the end of May 2022, Inflation is currently at 6.3%. The Fed's target inflation rate is 2%. The Consumer Price Index is the best measure of inflation. CPI is what things cost us as consumers. As prices rise, currency loses value, and it doesn't have as much purchasing power as it once did. In other words, whatever a dollar can buy is reduced over time. In the last 75 years, consumer prices increased by more than 7% in a 12-month period five times. The most dramatic increases in inflation were connected to oil supply shocks. In 1974, the cost of energy goods and services increased an average of 30% compared with the year before. In 2021, they rose about 20% compared with 2020.
There are a lot of factors on why our market has shifted so fast, but it is not doom and gloom. We are getting back to a more historical normal than we have recently seen and people will always be in the market to buy and sell homes. With that being said, buyers are starting to see a glimmer of hope, and sellers are slowly adjusting their expectations.
The Fowler Group will always be here to provide the most value to everyone we have the pleasure of working with. Please let us know if you have any questions as we navigate this rapidly shifting buyer-seller dynamic.
The Fowler Group at Coldwell Banker Realty