Is the realestate bubble bursting?

[ivinsfan]

Interesting tidbit from recently spending a day looking at new homes. Agent mentioned that as interest rates have gone up that the builder has been reducing prices. It seems that they have a target cost per month for the customer and they have enough flexibility in the pricing to reduce prices as needed to keep that cost per month for the customer steady as interest rates increase.

We saw this happen after the big crash in Southern UT while poking around for a snowbird home...BUT also found lot sizes reduced, common areas made smaller and many "standard" items of lesser quality or less desirable. If you wanted apples to apples it definitely cost more money.


IMO successful builders are a lot like farmers, flexible and able to adjust on the fly. If they don't they won't stay in business.


My favorite part of the whole process was the several longstanding builders in the area let undeveloped or partly developed projects go back to the bank. After some time went by they bought each others failed projects for pennies on the dollars.

 

[copyright1997reloaded]

The return of buyers may be short-lived.

Mortgage rates had a peak at 7.08% as measured by the Fed: https://fred.stlouisfed.org/series/MORTGAGE30US(well, at least a localized peak) in late October/early November. As rates started to fall in January and into February, some on the sidelines who were interested in purchasing (but on the sideline due to higher rates) jumped as 30-year mortgage rates fell about 1% (to 6.09% on Feb 2, 2023).

I have been watching real estate in a particular market for the last 9 months, and I saw a slew of houses that I had marked as interesting all of a sudden go pending in February.

Mortgage rates are now back above 7%.

We all need to remember that pending closures and actual closures are rear view indicators, the houses closing now got offers three weeks or so ago.

The question is what happens now that rates have moved back up. I'm not so sure another big wave of buyers will occur now, or even if rates back off a percentage point. I believe (just a hunch) that the above (a bunch of buyers waiting for rates to drop) won't be as quick or as big in number. Similar in concept to a market index (or stock) that falls to a certain point, a rush of buyers come in to get a bargain, it goes back up, and then falls back to that point again. Each time the low is tested the probability of breaking through the support level goes up...because there are less buyers waiting for a "bargain" at that price level.

I may be talking my book, but I don't think the housing downturn is over.

 

[Montecfo]

The return of buyers may be short-lived.

Mortgage rates had a peak at 7.08% as measured by the Fed: https://fred.stlouisfed.org/series/MORTGAGE30US(well, at least a localized peak) in late October/early November. As rates started to fall in January and into February, some on the sidelines who were interested in purchasing (but on the sideline due to higher rates) jumped as 30-year mortgage rates fell about 1% (to 6.09% on Feb 2, 2023).

I have been watching real estate in a particular market for the last 9 months, and I saw a slew of houses that I had marked as interesting all of a sudden go pending in February.

Mortgage rates are now back above 7%.

We all need to remember that pending closures and actual closures are rear view indicators, the houses closing now got offers three weeks or so ago.

The question is what happens now that rates have moved back up. I'm not so sure another big wave of buyers will occur now, or even if rates back off a percentage point. I believe (just a hunch) that the above (a bunch of buyers waiting for rates to drop) won't be as quick or as big in number. Similar in concept to a market index (or stock) that falls to a certain point, a rush of buyers come in to get a bargain, it goes back up, and then falls back to that point again. Each time the low is tested the probability of breaking through the support level goes up...because there are less buyers waiting for a "bargain" at that price level.

I may be talking my book, but I don't think the housing downturn is over.

I do think you are right. Affordability is the issue. But there is strong demand for housing formation also, as we are under-housed. But despite this housing sales have continued to drop in a stalemate with cheap mortgage holders.

Pricing has dropped since the top but not by a lot broadly speaking.

 

[Chuckanut]

I never had a mortgage rate as low as 7.1% interest. Never. Not in 40+ years of mortgage payments.

 

[Montecfo]

I never had a mortgage rate as low as 7.1% interest. Never. Not in 40+ years of mortgage payments.

Really?

My first was 12.5 pct I think. 2nd was I think 7 pct and they have been 3.5 pct and lower for the past 10-15 yrs.

 

[Retired Expat]

Market value of our vacation home was up 80% during the peak from what we paid 5 years ago, but that was only on paper. You have to sell to make it real which I have no desire to. Probably now up only 70% instead. Did I lose 10%? No, and that is a terrible way of looking at things! If and when we sell I will hopefully still be happy with the gains what, ever they are, and we will remember all the enjoyment the house gave us! How much money we made by renting it out sometimes, or the great vacations we took while doing home exchanges. Really need to look at the bigger picture sometimes…..

 

[copyright1997reloaded]

I never had a mortgage rate as low as 7.1% interest. Never. Not in 40+ years of mortgage payments.

When you had that over 7.1% rate, your house most likely cost a lot less, even in inflation adjusted terms. The issue isn't the rate, it is the overall monthly cost of the home compared (Principal + Interest + Taxes + Insurance) compared to wages.

Check out this National Association of Realtor data: https://cdn.nar.realtor/sites/default/files/documents/hai-12-2022-housing-affordability-index-2023-02-09.pdf

If I were in the market of buying (and i am), I would be in no hurry here as the effect of higher rates works its way...

ETA: One way my thoughts above could be wrong is if inflation stays higher for a longer time and gets entrenched in a wage spiral. In this scenario (ala 70's), even though standards or living aren't increasing the price on real assets (e.g. housing) increases.

 

[aja8888]

Really?

My first was 12.5 pct I think. 2nd was I think 7 pct and they have been 3.5 pct and lower for the past 10-15 yrs.

Being older, I paid the price (from memory):

8 1/4% in CT in 1976 (bought house)

18% in CA when I went to work for Big Oil in 1981.

Refie'd to 10% in 1983 or so.....thought I died and went to heaven.

Moved to Texas in 1992 and assumed a HUD house (fully assumable, non-qualifying loan) with an 8% note until we paid it off in 2014.

 

[copyright1997reloaded]

Distribution of Mortgage rates

With 99% of existing mortgages under the current rate, there will be great reluctance to refinance or move.

 

[JoeWras]

With 99% of existing mortgages under the current rate, there will be great reluctance to refinance or move.

You know, this is interesting because this time it's different. And what I mean by that is the spike in the 70s occurred when old timers like my parents didn't have a mortgage. People like my parents got 10 or 15 year mortgages. If they bought in the 50s, they were mortgage free by the 70s. They also had an attitude: pay it off. Period. No refinance or second mortgages.

You also still had a good deal of 1960s people getting shorter term mortgages, so when the spike hit, they had paid off a lot of principal.

So there was nothing or little to refinance.

Ultimately, it is going to take something like a hard recession that forces people to move to shake up those clawing onto their old mortgages.

 

[Ian S]

Prices here in the Sedona AZ area may have stabilized if our home is any indication.

 

[2HOTinPHX]

Anyone seeing any drastic changes in the market where they live? No bubble bursting is Phoenix yet despite rising interest rates and temperatures.

From Refin for Phoenix:

In August 2023, Phoenix home prices were up 2.3% compared to last year, selling for a median price of $440K. On average, homes in Phoenix sell after 36 days on the market compared to 38 days last year. There were 1,373 homes sold in August this year, down from 1,586 last year.

 

[COcheesehead]

3 years ago to build in our ‘hood was 350/sq ft. Today it’s 500+/sq ft. Western Colorado.

 

[FlaGator]

Not bursting (yet) in the FL Panhandle. A lot of curious activity, though - unusual financing, sales happening at list with a lot of debt even at current rates. Last of the FOMO crowd, relieved prices have stopped increasing? Time will tell.

My local market has been driven by the ABNB/VRBO crowd looking for easy money, and this season did not go well. Property tax bills for those higher valuations just got posted and insurance has jumped. Pain ahead, on top of the slower rental season.

As a "it's a bubble and will burst" adherent, it's just a matter of time. Affordability is at all-time lows, sales volume is in the ditch, and rates are not dropping any time soon. Could be wrong, stupidity often lasts longer than a rational person's patience.

I wouldn't buy right now, also not in the window to sell. I can wait for things to play out. Bought my house to live in, don't care what it sells for when/if it's time to move.

 

[Katsmeow]

We sold our house in Texas a few months ago. We went under contract very quickly. The market had definitely decreased a bit in price from, say, April of 2022 (probably the peak in our area) but was still a good market.

We then moved to Delaware. Now, my info here is based upon where we were looking for a house (went under contract in July). The market was completely insane. Almost every house (except those with problems or overpriced) was going under contract almost immediately with multiple offers.

I asked my agent how long it would take for us to find a house to buy. Inventory was very low. I had been warned by others that it could take several months. She said it depended partly on when we found a house we wanted to buy. Having done that, she said it would depend on how long it took us to understand how to make an offer that someone would accept. I had been following the market online for a few months and knew how competitive it was. Even before we left Texas I would see a house come on the market in Delaware and go under contract immediately and almost always selling above list price. So, we assimilated all the information and went under contract on the first house where we made an offer.

Of course, I assume that things are slowing down now since it usually does in the fall...

 

[JoeWras]

Went down last fall. Shot up even higher this spring. Steady now with maybe a drift down.

No bubble bursting yet.

 

[Aerides]

Not even close. Houses here keep surprising me with their listing prices. And not many. I don't think even 5 have listed in the last 3 months? Used to be 5 available at any given time (700 home neighborhood).

 

[ShokWaveRider]

There are 2 types of legacy homes in our small 600 home development. It is a private Golf & CC with optional membership for residents. We are on average between 1 and 2 miles from the beach depending on the home's location. Most homes enjoy Golf, Water or Intracoastal views. Prices vary accordingly. There are 10 homes for sale currently and I think that is a lot.

1) Pre-2001 with copper pipes and stick built.
2) Post 2001 with CPVC Piping and Concrete Block Construction.

Homes vary from 1,700sqft (Very Few of those) to 5,000 sqft, the majority of the post 2001 being 2,500 - 4,000 sqft.

The pre-2001 homes are much cheaper than the post 2001 homes. Stick built homes are sitting forever on the market.

Well-built post 2001 homes in our small subdivision of the development are holding their price and vary from >$400 to $500 per sqft. However, are taking more time to sell and I have noticed that a few offers have fallen through. Sales are definately slowing down, but prices seem to be holding.

 

[Time2]

In the Fl. panhandle here, I went to a realtor a couple weeks ago to see about selling a property. During the conversation the realtor said that housing prices have dropped about 15%. This doesn't fit the narrative I have seen heard, which is that prices were steady. So I'm confused. What's new!

 

[JoeWras]

In the Fl. panhandle here, I went to a realtor a couple weeks ago to see about selling a property. During the conversation the realtor said that housing prices have dropped about 15%. This doesn't fit the narrative I have seen heard, which is that prices were steady. So I'm confused. What's new!

Location, location, location.

Also keep in mind that FL has had an absolutely tremendous rise over the last 5 years. Then on top of that you have local market effects.

 

[Exchme]

MIL is selling a home in a small town in the midwest. Realtor had recent comps at $250K so had her list at $225K in hopes of a quick sale. House is in good shape, but no nibbles, barely any showings, had to keep lowering it and after 3 months finally got an offer at $180K. Buyers are getting a 7.75% interest FHA loan, the highest rate in decades.

The realtor now says many more homes than usual are hitting the market and there are fewer than normal buyers. So I'd the bubble is bursting in less desirable areas.

 

[Fermion]

I would agree the bubble has deflated a bit on older homes in cheaper neighborhoods, but there is a point where the air just won't come out because of the sky high cost of building a new home.

Materials are about double in cost or more to what they were a decade ago, shingles, wire, drywall, fixtures, plywood, fasteners, pipe. Even if labor were the same (which it is not), it costs a fortune now to build a new home and that adds some stability to the bottom of a bubble burst, at least in homes that are sold on the value of the home and not the scarcity of the land.

 

[jazz4cash]

We sold our house in Texas a few months ago. We went under contract very quickly. The market had definitely decreased a bit in price from, say, April of 2022 (probably the peak in our area) but was still a good market.



We then moved to Delaware. Now, my info here is based upon where we were looking for a house (went under contract in July). The market was completely insane. Almost every house (except those with problems or overpriced) was going under contract almost immediately with multiple offers.



I asked my agent how long it would take for us to find a house to buy. Inventory was very low. I had been warned by others that it could take several months. She said it depended partly on when we found a house we wanted to buy. Having done that, she said it would depend on how long it took us to understand how to make an offer that someone would accept. I had been following the market online for a few months and knew how competitive it was. Even before we left Texas I would see a house come on the market in Delaware and go under contract immediately and almost always selling above list price. So, we assimilated all the information and went under contract on the first house where we made an offer.



Of course, I assume that things are slowing down now since it usually does in the fall...

I am curious to understand when/how you learn the actual sales price. All the resources I know don’t report the sales price until some time after the property closes. Sometimes it takes months to be published.

 

[JoeWras]

I can't tell the list vs actual trend from county records unless I follow a house from list to sale. My neighbor is a realtor and he usually gives me a pulse on things.

For actual price trends, our county lists comparable sales for my home, updated every week. These are really handy. We are currently going into a re-evaluation period so I know pretty well what my value will be based on these comps.

 

[karen1972]

In our area, if someone lists their home slightly above the Jan 2022 prices but less than April 2022 prices, it has an offer within the week, often the day it lists. New construction for the most part has still been able to increase rates consistently as they build out the subdivisions. You can get multiple offers but its not guaranteed any longer.

The only ones I see sitting are overpriced by about 10%, which would be more than April 2022 pricing... we are sitting just between that with some slight increase over the summer.. which I expect to cool again into the fall so kind of flat.