Editor’s note: Daniel Encell of Berkshire Hathaway (www.danencell.com) joins the News-Press’ roster of real-estate columnists today.
Wow. What a difference a couple of months can make!
From the first quarter of 2022 to the fourth quarter, we have gone from the hottest seller’s market in history, to a real estate market that is eerily quiet where sales are few and far between. So what changed to cause such a dramatic turnaround?
The answer: interest rates.
In early 2022, and for much of the recent real-estate boom (also known as the “Pandemic Seller’s Auction Market”), homebuyers were enjoying record low interest rates hovering around the 3% level. Then, starting in early 2022, in a rapid series of increases, 30-year fixed mortgage rates eclipsed 6% and are now nearing 7%.
Between interest rates’ meteoric rise and double-digit home price increases for two years straight, local buyers suddenly find themselves priced out of the market.
Homes that previously were flying off the shelves with multiple offers are now sitting. Showings have declined rapidly, and buyers’ enthusiasm seems to have evaporated.
The days of “sight unseen offers” and “no loan, no appraisal, no inspection and no contingency offers” have vanished. As quickly as it had started, the buying frenzy has ended.
And what has happened to all the buyers who were actively looking to purchase a home prior to the jump in rates? In droves, they have become renters, creating the largest rental crisis in history.
Nationwide, rent rates increased nearly 20% in the past year, and selection is at an all-time low.
So does the end of the strongest seller’s market in history mean that we are now in a buyer’s market, similar to 2008? Are home values going to plummet? Can buyers expect huge discounts off asking prices and extensive repairs from sellers?
The answer is no.
At least not yet.
The problem for buyers who are expecting the strength of the Buyer Market/Seller Market pendulum to swing in their favor is inventory (or lack thereof). There is still nothing for sale. Inventory levels are at record lows — around half of pre-pandemic levels.
According to the National Association of Realtors, “Despite weaker home sales, multiple offers are still occurring with more than a quarter of homes selling above list price due to limited inventory. The current lack of supply underscores the vast contrast with the previous market downturn from 2008 to 2010, when unsold inventory levels were four times higher than they are today.”
There are two main reasons why Santa Barbara does not have enough homes offered for sale. The first reason is that an inventory shortage is somewhat self-fulfilling. Many people who want to list their home for sale are reluctant because, “there is simply nowhere to go.” No one wants to sell their home without a reasonable expectation that they can find something suitable to replace it. And don’t expect new construction to solve the problem. The hurdles to build here — in time, effort and money — are daunting.
The second reason is more permanent. Most homeowners who have a mortgage, either purchased their home recently at a 3% mortgage rate or refinanced their existing loan to get that same attractive 3% rate. With home prices and mortgage rates rising so rapidly, it doesn’t make sense for most homeowners to sell.
Absent death, divorce, etc. (all of the involuntary reasons people sell) everyone is essentially locked-in to their present home. And they will remain locked-in for the rest of their attractive 3%-30-year-fixed-interest-rate-life. Homeowners are going to cling to those loans like they were a Wonka Golden Ticket!
So where does that leave the Buyer’s Market/Seller’s Market pendulum? About as close to neutral as it could possibly be. The local real-estate playing field has been leveled to favor neither buyers nor sellers. There are very few listings available and fewer buyers to purchase them.
Homes are taking longer to sell. Multiple offers are less common
In short, we are back to the balanced market we had before the pandemic — just with fewer sellers and buyers.
Expect a thinly traded local real estate market over the next year where the number of sales remains low, but prices stay constant.
And that pesky inventory shortage? Better get used to it. It is here to stay. Forever.