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December Market Update

Market Update

December Market Update

Winter Buying Opportunities In a Less Competitive Market

 

As we now know, the average 30-year mortgage rate reached record lows in the third quarter of 2020, dipping below 3% for the first time ever. The super-low cost to borrow priced more potential buyers into the market because of the massive increase in affordability. For example, if you can afford the monthly payments on a $500,000 loan at 6% (~$3,000/month), then you can afford a $700,000 loan at 3% (~$3,000/month). Homebuyers, could afford more home, so conventional loans rose to the highest level since 2006, and prices rose at the fastest rate in history. Although prices rose quickly, buyers weren’t getting priced out of the market because of the effect interest rates have on affordability. Financing through conventional loans remained elevated through Q1 2022, which marked a sharp increase in mortgage rates and inflation.
 
The changing economic environment in 2022 wasn’t lost on cash buyers, either. Inflation moved higher and depreciated the value of a dollar, which caused all-cash home purchases to jump to the second-highest level on record (just below the all-time high reached in 1988). Buyers’ money was worth more, so spending in the near term had more value. We expect all-cash purchases to stay elevated, as mortgage rates will likely remain in the 5-8% range for the foreseeable future.
 
Competition for homes typically softens during the winter months as people focus on the holidays and tend to be less active. Add in 15- to 20-year-high mortgage rates, prices still near record highs, high inflation, and worries over a recession, we can see that the competition over homes tends to decline further. This year, national sales have dropped every month since January according to the National Association of Realtors, a 32% drop overall. It's expected that 2022 will have about a million fewer sales than 2021. Of course, 2021 had the largest number of sales since 2006, with nearly a million homes sold above the long-term average. With that in mind, it stands to reason that about a million fewer homebuyers than average would be in the market in 2022.
 

The Local Lowdown

 

As we mentioned above, the market is cooling on both the buy and the sell sides. When there are fewer sellers, there are also fewer buyers, because some buyers are selling their homes to move to others in the same market. New listings have declined faster than sales, causing inventory to decline near the all-time low level we experienced last winter. However, the key difference is that fewer buyers are on the market — so, even with low inventory, buyers can still find the home that’s right for them. The low inventory has insulated prices from a major reversal. Although prices have contracted, they have maintained price gains over the past 24 months.
 
Moving forward, prices will likely contract slightly more through the winter, which is typical. Without any signs of interest rates dropping, we’re entering a stage of slower, longer-term growth — but still growth. In the short term, however, prices may come down a little more. Real estate has shown itself to be one of the best investments in recent history and is, on average, the largest store of wealth for an individual or family. Price appreciation will likely move to a more normal growth rate of around 5-6% in the coming years, which makes for a much healthier market than what occurred in 2020 and 2021.
 
As always, Arrive Real Estate Group remains committed to helping our clients achieve their current and future real estate goals. Our team of experienced professionals are happy to discuss the information we’ve shared in this newsletter. We welcome you to contact us with any questions about the current market or to request an evaluation of your home.
 
 

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Arrive Real Estate Group

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344 Railroad Avenue, Suite 200B

Danville, CA 94526