Are homebuyers going to hit the pause button?

Mortgage Consultant Bob Schwab posed an interesting question on his blog recently: is purchase demand softening? He writes that over the last several years, buyer demand has far exceeded the housing supply. This has led to home prices appreciating by an average of 6.2 percent each year since 2012.

The Foot Traffic Report, Realtors Confidence Index (both National Association of Realtors), The Showing Index (ShowingTime), and The Real Estate Broker Survey (The Z Report by Zelman and Associates) are the four major reports used to measure buyer activity. Three of the four have revealed that the purchase demand may, in fact, be softening:

Image result for housing market

The Foot Traffic Report

Latest reports say buyer demand remains strong, due to supply and new construction remaining unable to keep up with buyer demand – despite a healthy economy and labor market.

The Showing Index

In July 2018, the Showing Index recorded buyer interest deceleration compared to the previous year for the third month in a row. They think buyer demand is softening.

Realtors Confidence Index

This measure reported slower homebuying activity in July 2018, down from the same month one year ago. It is the fifth straight month they’ve seen a decline, so they agree buyer demand is softening.

The Real Estate Broker Survey

The Z Report also finds buyer demand to be softening, stating that “a level of “pause” has taken hold in many large housing markets.” Their buyer demand rating of 69 (1-100 scale) is above average, but down from 74 last year.

Image result for housing market

When most of the major measures of buyer activity report that demand is softening…it may just be true. According to Bob, the strong buyers’ market directly after the housing crash was followed by a six-year stretch of a strong sellers’ market. If demand continues to soften and supply begins to grow, as expected, there will be a return to a more neutral market. Though that wouldn’t favor buyers or sellers immediately, it is a better long-term look for real estate.

A direct quote from Bob: The era of cheap money might be coming to an end. Interest rates on mortgages are up three-quarters of one percent in the last year. The Federal Reserve is expected to raise short-term rates one-quarter of one percent at their September meeting and another one-quarter of a percent in December. Come October, bonds will have to stand on their own feet again as the Fed will officially end its “quantitative easing.” There are also some early signs of wage inflation as the unemployment rate continues to improve and businesses struggle to find employees. As I always remind my clients, mortgage rates are still fantastic from a historical perspective. They are still sitting in the mid to high fours. If you are considering buying a home or refinancing a mortgage this would be a great time to make a move.”

And my take: As rates and prices have increased, we are starting to see homes sit on the market longer and sell for less than they did six months ago. It really depends on the home and location. In Parkmead, buyers seem to want single story homes with current updates and a flat yard, as with the sale of 1691 Lilac. We still have an inventory shortage, but buyers are now taking their time, and a shift isn’t necessarily a bad thing. We will see if the lull is seasonal, but it most likely we will see the rate of appreciation slow down and sellers may have to adjust what they believe the value of their home is and buyers may not get as good of a deal as they expected. 

Why Are the Interest Rates So Low?

buy a houseThere have been a lot of articles about interest rates and the stock market recently. First, the German 10-Year Government Bond Yield has hit negative territory. In layman’s terms, this means that Germany gets paid interest to borrow investors’ money, the same thing is happening in Japan. Thus, Germany and Japan are getting paid to borrow money.
On the surface, this seems silly. Why would investors take a negative yield or pay somebody to borrow their money? Because it’s safe. Investors will put money wherever they can in order to ensure they can safely recoup it in the future.
How does this help the real estate market? First, the demand for bonds keeps rates very low, making real estate leverage much cheaper (The Brexit will also have an impact, which will be a different post). When investors have a lot of cash and are looking to put it somewhere, real estate investing becomes a good place to do so.
According to the National Association of REALTORS®, the number of homes that went under contract to be sold in April was the highest in more than a decade. It was also the strongest month in more than eight years for new home sales – with a 16.6% jump from the previous month. We do tend to see a bit of a lull in the summer as families head off for vacation.
If you are a buyer, it might be a great time to jump into the real estate market! Give me a call if you would like some help.