Do you ever get the feeling that something is about to change?

You might not be able to explain exactly what, or when, but just get the feeling that somethings not quite right.

There are an increasing number of people that are starting to feel that way about our local real estate market.

Without a doubt, the past two years have been crazy. Home prices have been going through the roof, multiple offers and bidding wars have become the norm, and it just feels out of whack.

This can’t continue, can it? Surely, the local real estate must be at, or close to its peak.

In this week’s blog, I take a look at current market conditions and explain what we are likely to see going forward, especially in the face of rising mortgage rates.

Watch the following video, or continue reading below, to learn more.

Has the Real Estate Market Peaked?

When the pandemic hit two years ago, many people believed, or assumed, the real estate market would be negatively impacted and crash like it did in 2007/2008.

As we now know, the housing market didn't crash. The pandemic actually caused the housing market to accelerate and take off.

What had been a strong housing market before the pandemic went into hyperdrive.

Homebuyer demand shot up, supply disappeared and every new listing was greeted like chum in shark-infested waters. Buyers have grown weary and there’s a growing sense that the madness must come to an end, and I agree 100%. It’s just not realistic to sustain 20% plus price appreciation year-over-year. It just doesn't make sense.

Even with the price increases we have experienced over the past couple of years, homes are still more affordable now, as a percentage of income, than they were in the early 2000s. They are certainly less affordable than they were a couple of years ago, but that doesn’t mean unaffordable, yet. Some segments, namely first-time buyers, are facing challenges and finding it difficult to compete in bidding wars and multiple offer situations.

Should We Expect a Change?

Whenever a change, or shift, occurs in the housing market we don’t know that it’s happened until after the fact.

The market can change on a dime, to be honest with you. A tipping point is reached that is often triggered by an event or multiple events (rising mortgage rates and rapidly rising gas prices for instance). That doesn’t mean prices are going to start falling overnight, or at all. I don’t think that is going to happen, but I do believe the pace of appreciation that we have been experiencing is nearing an end.

While everyone has an opinion about what is going to happen going forward, the truth is nobody knows for sure, but what we have been, and are experiencing, can be directly tied to the economic law of supply and demand.

Unlike the early 2000s, when home prices were soaring even though there wasn’t an imbalance between supply and demand, we definitely have more demand for homes than a supply of homes currently. I’m talking real demand here, not artificial demand caused by lax lending rules and speculation. We are seeing this in all of the markets S2 serves, here in Frisco and Prosper, in Southern California, and Phoenix, AZ.

On the demand side, buyers are reaching the point where brutal market conditions are taking a toll. Many are tired and have grown weary. We are starting to have more buyers tell us they are taking a break from the market until things settle down. Even in the face of rising home prices and rising mortgage rates, buyers are starting to adopt a wait-and-see approach, especially first-time buyers and first-time move-up buyers.

On the flip side, we have an awful lot of pent-up seller demand in the market right now. We don't talk about pent-up seller demand very often, we usually talk about demand from the buyer perspective. There are a lot of homeowners that had been planning on selling their home over the last couple of years that haven't.

When the pandemic hit no one wanted to put their home up for sale, which exacerbated the supply problem we were already experiencing. Now, as we've hopefully moved past the worst of the pandemic, those same sellers feel stuck because if they do sell where do they go? They are victims of the supply problem they are helping to create. A catch 22.

Supply normally starts going up this time of year and we are starting to see that. This morning there are 117 active listings in Frisco compared to just 43 three weeks ago. A step in the right direction, but don’t get too excited as at this time 3 years ago there were approximately 900 homes for sale.

Considering how much equity has been gained over the past couple of years more sellers will decide to take advantage of that and list their homes for sale. In addition, more new home communities are expected to come online. How much additional inventory can we expect to see this year? We’ll have to wait and see, but any increase in supply, especially if we see a decrease in demand, will bring relief.

The Impact of Rising Mortgage Rates

One of my neighbor's homes recently went up for sale. Although activity was busy, and the home did receive multiple offers, there weren't quite as many people out looking as I would've seen a month or two ago. Maybe a small sign that things might be shifting a little bit.

Additionally, I'm getting a few more emails from builders, especially with communities in more outlying areas, letting me know they have some homes available that will be completed in the next couple of months. So we're starting to see a few small signs that the market might be shifting.

In order to see a noticeable change in our local real estate market, we are going to need to see changes on both the supply and demand side of the equation.

While the jump in mortgage rates we have seen lately is likely to have some impact on demand, it might not be as much as you think and is unlikely to cause home prices to decrease at all.

Here is a look at what home prices have done in rising mortgage rate environments over the past 30 years;

As people, we tend to have short memories at times and have been spoiled the past couple of years by ultra-low mortgage rates. Even though mortgage rates are over 4% for the first time in 4 years, while it feels high, they are actually just back to where we were in 2018 and 2019, both of which were very strong real estate markets.

Bottom Line

As mentioned above, changes in the housing market can occur on a dime. Mortgage rates are only part of the overall equation. With inflation at 40-year highs and gas prices soaring people have less disposable income. Less disposable income means less to spend on housing, which could soften demand.

On the flip side, the latest projections show the population of the DFW Metroplex is expected to increase by another 3 million people by the year 2030. Those people will all need places to live so there likely won’t be a dramatic drop in demand.

As more supply comes to the market I do expect some balance to return which will help ease the multiple offers, bidding wars, and pace of appreciation.

Have additional questions or a specific situation you would like to discuss in more detail? Please schedule a call or send us an email at Contact@S2RealEstateTeam.com