Home Sales Fall Despite Falling Rates?

Another great blog from Jay Vorhees at JVM Lending! He asks, with home sales falling despite the rates also falling, whether the end is finally here? “We can only hope,” he quips. Read on for more from Jay, and a bit of insight from yours truly at the end!

Tulip Mania

In the 1630s, the Dutch experienced one of the world’s first major financial bubbles – Tulip Mania. They were all convinced that the price of the exotic (at the time) tulip bulbs would increase forever, not taking into account how easy it was to reproduce them and how the ridiculously high prices were clearly not sustainable.

Everyone (even common laborers) was borrowing money to buy as many tulips as they could, trying to get in on the action. At one point, a single bulb cost as much as some of Amsterdam’s most expensive mansions at the time. Then, it all collapsed. There have been many bubbles since, including the 1929 stock market crash, the dotcom crash of the late 1990s, and most recently – the mortgage meltdown of 2008. All those bubbles were partially driven by easy credit, so every time the Fed lowers rates, I am terrified that it is fostering a new bubble.

Home sales fall in June – despite lower rates, higher wages, and lower unemployment

Image result for housing market slowdown

So, that is why I was actually marginally encouraged to see this recent headline and article in the WSJ: U.S. Home Sales Stumble (in June). “Home sales slumped in June as home prices for major West Coast cities decline for the first time since 2012, ending the spring selling season with a thud.”

This is amazing to me because rates were about 1% lower than where they were the previous June, and everyone thinks rates drive housing prices. But, they clearly don’t. Home sales fell in the face of rising wages and decreasing unemployment too, leaving economists perplexed, as those factors are also supposed to drive prices higher.

Sales are probably falling because borrowers are hitting their affordability limit, and because buyers are acting prudently (unlike prior to 2008). While fewer sales overall are never a good thing, it is a good thing to see a potential bubble start to deflate instead of popping – so YAY! (sort of)

I might add that a huge brokerage we work with in Texas is currently projecting a downturn in the near future, telling agents that they need to trim expenses by 20%. So, it is not just the West Coast experiencing a slowdown. And finally, despite the apparent slowdown, numerous agents we work with are still experiencing record years simply because of their relentless marketing. We too have almost tripled our purchase volume year over year by improving our value props and increasing our marketing efforts.

Takeaways from this blog: This slowdown might be averting another bubble-pop! The Fed can’t stimulate everything with low rates. They might call Japan and ask how their low-rate experiment has gone, as 20 years of near-zero rates have not revived Japan’s economy at all. No matter how soft markets get, the overall market remains huge and business can always be found with stellar value props and very aggressive marketing.

Kristin’s insight: Some houses still have multiple offers, usually ones that are updated, and are priced slightly below market or in a highly desired neighborhood. The rest are sitting longer on the market and may see a price reduction or two as buyers become much more discriminant.