Fall is typically the time of year when the real estate market starts to cool off. Buyer and seller activity slows and everything just starts to settle down as attention shifts towards the holidays. Last year that didn’t happen. As soon as we came out of the Covid lockdowns the real estate market starting to gain steam and just kept going through the fall and winter. So what’s going to happen this year?

In last week’s blog post, I specifically talked about what we should expect in the 4th quarter. In this real estate market update for October 2021, I talk specifically about the future of home prices and mortgage rates. Continue reading below, or watch the following video, to learn more;

Considering what a strange year last year was, there continues to be a great deal of speculation about what the 4th quarter and beyond will bring to the real estate market. Common questions include, are we in a bubble? Have home prices peaked? Should I wait to buy a home? Are home prices about to fall? When should I consider selling my home? These are all valid questions that I hear on a regular basis.

I’m not going to pretend to have all the answers, and only you can make the decision that’s best for you, but I study the data, do a lot of research, and share my insights in an effort to make sure you have the information you need to make that decision.

In order to understand where the market is likely heading, it’s important to understand what brought us to where we are now. If you’ve seen any of my past blog posts or videos, then you’ll know that I have been saying home prices have been rising due to a supply problem, not a speculation problem, not house flippers, not due to crazy loan programs, but not having enough supply to satisfy demand. Take a look at the following graph:

This graph is looking at the active monthly listing count, nationally, for 2017, 2018, and 2019. As you can see, all three of those years followed what we would consider a “normal” pattern. Active listings typically start the year between 1.15 million and 1.25 million units and start climbing in early spring before peaking in late summer at approximately 1.4 million units.

As a comparison, here’s how 2020 looked;

2020 started the year with approximately 1.050 million active listings and peaked at roughly the same number in April. It’s understandable that once the pandemic lockdown was lifted potential sellers weren’t comfortable jumping right back into the market having strangers walk through their homes. As a result, the resale inventory never came back and continued to fall throughout the year.

In contrast, the pandemic, with work and school all happening from home, changed the definition of home for many and made them realize their current living arrangements no longer suited their needs. The following graph shows the change in demand as a result of the pandemic compared to supply;

The orange line on the left shows home sales in the second half of 2020 while the red line on the right shows listing supply. For a while, new homes were able to make up some of the difference, but considering new home construction has been lagging behind historical levels for over a decade, it didn’t take long for that supply to be absorbed.

By February 2021, the tipping point was reached, at least here in Frisco, as that’s when multiple offers, bidding wars, and rapidly escalating home prices started to appear in earnest.

The question now is, where do we go from here? In all honesty, nobody really knows for certain as nobody has ever forecast a post-pandemic real estate market before, but the leading indicators are showing that the real estate market is starting to return to a more normal seasonal pattern. Here’s how 2021 has looked so far;

We started 2021 with just over 600,000 active listings and rather than listing inventory climbing as we went into March and April, it fell due to the fact the buyer demand continued to outpace new supply. Listing inventory finally started to increase in May, but by August we only had slightly more inventory than we started the year with.

What the experts have been split on is whether we will finish the year following option 1, 2, or 3. Based on what I am currently seeing, it is looking like option 2 is the most likely scenario.

Here in Frisco and Prosper, after seeing slight increases in inventory, we have seen inventory slightly decline again over the past few weeks (see the latest market report here). After rising to just over a one-month supply (6 months of supply is needed for a market to be considered balanced), we have fallen back to 0.7 months of supply.

Inventory in Temecula and Murrieta has done the opposite and increased slightly over the past couple of weeks. After holding at right around a one-month supply, inventory is now running at 1.2 to 1.3 month supply.

We are still seeing homes sell incredibly quickly and multiple offers are still very much a part of the market, but rather than homes receiving 10+ offers they now might only receive 2 or 3. Home price appreciation is starting to moderate and we are seeing more price reductions. Those price reductions are not an indication that home prices are falling, because they’re not, but do reflect those sellers who priced their homes ahead of the market now bringing the list price down to where it should have been in the first place.

In May, homes in Frisco and Proser were selling for an average of 6% to 7% over list price, while in September that percentage had fallen to 1% to 3% over list price.

In Temecula and Murrieta, homes that were selling for 4% to 5% over list price are now selling for 1% to 2% over list price.

As long as we continue to have an imbalance between supply and demand we can expect home prices to continue to increase. I do expect the pace of appreciation to continue to moderate, but as mentioned in last week’s blog post, home prices are currently expected to rise through the end of 2025.

Mortgage Rates

Buyer demand has not only been fueled by the changing definition of home as a result of the pandemic but historically low mortgage rates. Rising mortgage rates could eventually put downward pressure on home prices if they rise too much, but that isn’t expected at this time.

Here is the latest forecast on mortgage rates over the next year;

While I don’t believe we will see mortgage rates of 3.4% by the end of the year as Freddie Mac is projecting, I do believe rates will continue to rise and be approximately 3.5% by this time next year.

While not a drastic rise, it will be enough to make some buyers pause. To put rising mortgage rates into a practical example, here is how your monthly principle and interest payment changes as mortgage rates rise.

For a $500,000 mortgage, your payment would increase by $346 per month if mortgage rates reach 4% compared to the 2.75% they were a couple of months ago. In addition, you would also be paying significantly more in interest over the life of the loan which directly impacts the amount of wealth you are building long term.

Bottom Line

The pace of appreciation will continue to moderate over the coming months as more new construction and resale homes come on the market. New home builders are starting to catch up which will help more existing homeowners, who have been holding off listing their homes due to not having anything else to buy, feel comfortable putting their home on the market. Keep an eye on changes in mortgage rates and they will impact your purchasing power, especially in a market of increasing home prices.

If you have a specific situation you’d like to discuss in more detail, please don’t hesitate to reach out at 888-447-9650. There’s never a cost or obligation.