What’s going to happen this year in the real estate market?
In the Conejo valley area, prices have been slowly coming down since the end of the third quarter last year. Despite this, average prices are still higher than they were this time last year. But things are definitely slowing down, and I predict this slowdown will continue into the spring.
Typically, there is a surge in inventory leading into the spring, and into the summer. However, this year is going to be slower than the past few years, with less inventory, and a decrease in buyer demand. We can already see this trend over here in the Simi Valley / Moorpark area, as the total inventory has been steadily decreasing, while the days on market for a home have been steadily increasing. However, all this could change, depending on the whims of the Fed.
It’s safe to say that the entire housing market right now is at the mercy of interest rates. If the Fed decided tomorrow to drop interest rates back to 3%, all of the insanity of the last few years would pick right up again. Fortunately, that is very unlikely.
The last few years were historical. Interest rates were at all time lows. It was a perfect storm of events that drove interest rates below 3% for the first time in history. I don’t like to say never, but I would be extremely surprised if we ever see interest rates that low again.
These low rates were a boon for many families that were able to purchase homes, that otherwise would never have been able to. And a lot of people who had planned to wait, were suddenly thrust into the market in order to take advantage of these rates. That’s why we saw so many buyers the last couple of years.
All of these buyers were in the marketplace, competing with each other for a number of homes that did not increase proportionally to the demand. Of course, with demand outpacing supply, this drove home prices up. But even with the fast rise in home prices, buyers had an unprecedented amount of buying power, and were able to pay these prices for homes. It was a wild couple of years, but unfortunately, unsustainable in the long run. So it’s actually a good thing that interest rates did increase.
But now we are experiencing the fallout of those wild years. Many buyers became discouraged with the difficulty of competing for a home, and opted to refinance their existing homes instead. This likely takes many of them out of the marketplace for at least a few years, as trading in a loan in the 3%s for a loan in the 6%s is going to be unappealing. So here we are back to interest rates.
If you were to look at today’s interest rates and compare them to where we were a year ago, it would appear that interest rates were really high today.
But that’s not really the case. Interest rates today are sitting at where they were in the early 2000s. I mean, the average interest rate is 7.76% since 1971, and we are well below that right now.
It is going to take time for this perception of high rates to fade from the public mind. Only then, will the market get back to normal. In the meantime, prices will continue to decline until they reach an equilibrium with demand. When will that be? Well, your guess is as good as mine. In order for buyers to have equal buying power at 6% that people did at 3%, prices will need to fall between 20 – 25% from their peak. Will prices fall this far? Maybe, but I feel like we will reach an equilibrium well before that.
There are still plenty of buyers out there waiting for their chance. Whether they are waiting for prices to fall, for interest rates to come down, or both. Here’s a little advice to those of you reading this article. If you are one of these people waiting on interest rates, don’t. There are three things that rates can do. They can go up, they can go down, or they can stay the same. The only benefit you will see from waiting, is if interest rates end up going down. But by getting into the market now, you have less competition from other buyers, and should interest rates fall again in the future, you can always refinance at a lower rate.
That’s my prediction for the market this year. Just remember that nobody can predict the future. Some prediction I would trust more than others, but at the end of the day, everyone is speculating, and nobody really knows. Do what’s right for you, what’s right for your family, with the information available.