A temporary slow down or market shift?

There are signs of a slow down in Mortgage applications, property value increases month over month, a slow down in the speed of homes under contract, and a decrease in rental prices despite July traditionally being the strongest month for real estate sales. The new home construction sector of the market is still booming and there is still a very low inventory of resale homes despite the two month trend of a slow down. It typically takes six months for the real estate market to confirm a long-term trend.

Home values have been on a constant climb for 8 consecutive years and have outpaced the expected value increase over the past 2 years in virtually every part of the United States. This is the 3rd longest bull market for the real estate industry since World War II. If home values continue to increase through the rest of 2018, then we will be in the 2nd longest bull market.

The Fed has done a few things to keep the real estate market going strong because the real estate market is roughly 40% of the economic market and they certainly want the economy to continue going strong. We have the lowest unemployment rate as a country in decades. First, the Fed has held down mortgage interest rates to historically low rates despite their desire to increase interest rates. Secondly, they have relaxed a few regulations on FHA mortgages. They have also slightly relaxed the acceptable credit score rating for loans, just to squeeze in a few more home sales.

Though the Fed greatly lessened the reins on mortgages before the last real estate market crash, that will not happen this time. They are still being very stringent in the mortgage vetting process to ensure applicants are able to afford the mortgage payment so that we do not have another market collapse.

It has taken ten years for the market to recover from the collapse of 2008. This recovery is much faster than most economists would have ever dreamed while we were in the middle of the collapse. Even though many people feel that home prices have become too expensive, in most parts of the country, the home values have simply returned to the 2008 values.

Where else in the retail market can you find items that are still the same or lower than ten years ago? Not very many places for sure. The struggle is that inflation has increased in the past 10 years while incomes have not increased much, if at all so it is now harder for many people to afford the current home values.

The before mentioned slow down in mortgages may simply be a result of the fact that most of the country has historically low inventory of homes for sale.  If this is the reason for a slowdown in mortgages, then the days of homes on the market should not increase. If the demand from buyers is still very high and inventory is still very low, then homes should still be selling very quickly.

Another possibility is that the market may simply be in just a temporary slow down for resale homes, which does happen on occasion, even in a strong market. This is likely and only time will tell if the slow down in home sales and mortgages is temporary or if it is the shift in the market.

What could be causing the shift in the market if the economy is still going strong and the resale home inventory is still at an all time low? One possibility is that home prices have reached a point where first time home buyers can no longer find an affordable home. First-time home buyers are typically 1/4 to 1/3 of the purchase market. If they cannot find an affordable home, then home sales and mortgage applications will be reduced, causing homes to sit on the market a longer than they have been when homes were more affordable.

A few different factors have affected the lack of inventory. One reason is because the baby boomers have not downsized despite no longer being underwater on their mortgages. Another factor is that Reality TV home repair shows have become very popular and people have decided to repair or remodel their homes rather than sell their older homes and purchase new homes. A third factor is that people have not placed their homes on the market because they have either not been able to find another home that they can afford to purchase or that they cannot find a suitable home with the current lack of inventory.

The real estate shift has been forecasted by economists for the past two years, though it has yet to fully arrive. The arrival may have started and will likely be a slow shift, but two months is too early to know for sure if the market shift has started and the predominant seller market will begin swinging back to a buyer’s market. For that to happen, the inventory will likely have to increase or the amount of interested buyers will have to decrease.

While there are signs of the Real Estate Market slow down in a few areas, it may be too early to tell just yet.

Written by Ryan Odenweller, Keller Williams Realty