“Expect home price appreciation to “fall further,” Mark Fleming, chief economist at First American and author of the report said, “as the hot sellers’ market of early 2022 turns in favor of buyers.” (Marketwatch, October 22, 2022)
There’s a home one minute walk from me that recently sold for $1.2M after 5 months on the market. A couple of weeks before they listed their house this past Spring, I had closed on my new house, reasonably identical, for $1.4M.
Seeing their house close for 11% below original asking and others’ thoughts about a buyer’s market, I had feelings of guilt that I had been made a fool. During the buying process, my agent had told me of another home, slightly larger, that just sold for 1.6M a few days prior. My price was supposed to have been a steal. But…
If I had waited six months, I’d be in a buyer’s market and look at the savings I could have had. I’ve screwed myself and my family for years.
I went deeper to understand the individual economics, and it turns out this is wrong. As I write this, mortgage rates today are around 7%. Someone who buys a house (standard 20% down, 30 year term) for $1.1M today is going to pay about the same in monthly costs that I did even though their price is 23% less (the difference in down payment is ~$60K). (Use Bankrate to see this for yourself)
Anyone who pays more than $1.1M is technically paying more than me for their house. To really see if I made a big mistake, I have to see if similar homes drop below $1.1M in the near future.
This isn’t what we’re taught however. The articles above, and even the agent who sold my house (more on that below), the story is prices drop = buyer’s market, prices rise = seller’s market.
What’s being missed is the actual cost to buyers and what rising costs mean to sellers.
For both buyers and sellers, agents should be comparing house prices based on costs, almost in deflationary / inflationary terms. Your targeted X monthly spend would buy you a home at $1.1M today, $1.5M 6 months ago, and $1.7M 12 months ago.
When I listed my previous house, my agent was very optimistic it would sell for over $1.2M. This was right at the beginning of the Ukraine/USA conflict and rising interest rates. Almost immediately, we (and everyone else in the local market) were dropping prices. It ended up selling 4.5 months later for just $870K. This was an incredibly deflating experience. My agent told me interest rates are rising, this is becoming a buyer’s market, etc.
Looking back on this, what she should have said is, when we went to market the typical buyer with $X spend would be able to afford $1.2M. What that spend looks like at this moment is only $1.1M. Should we change the price to match this?
Instead, it was more like, people think this is high, they can’t afford the same level of house, no one is selling in this market, we should lower. It was vague and reactionary.
If I had been given that information, it would have been very clear what to do, and to which target I needed to reach the same type of buyer.
To show you this, using the $870K price point:
- 7% = $5300/month
- 6% = $4838
- 5% = $4400
- 4% = $3983
Paying $1.2M at 4% rates (around the time we started to sell) would be $5219/month; buying my former house now for $870K would have been around the same monthly cost as buying it for $1.2M 6 months ago.
Does this imply a buyer’s market? I argue that this is neither a buyers nor sellers market.
If I had known what was about to happen (war, economy, inflation, interest rates) around the time I was make the decision to sell, I would not have put the house on the market. I ended up suffering an expectation loss of over $300K, nearly 30%. For new sellers, who already see these rising rates, why should they sell?
In other words, if I were to sell my new home right now I am totally screwed. We’ve seen that a buyer purchasing for $1.1M right now would have been able to afford $1.4M six months ago. I can’t expect more than 1.1M for it. I can’t afford to lose money on the transaction, so I hold off and wait. Even if I got a better job that required me to move, this impact of interest rates might make it impossible for me to do so in the coming years.
Over the long term, more sellers will hold off because they can’t get a worthwhile price, even though buyers will actually be paying the same amount in monthly costs. No one wins, buyers nor sellers.
The interest rate is a friction that prevents transactions and mobility around the nation. A hot real estate market is hot for both buyers and sellers. When sellers can benefit from selling, they’re more likely to do so. It doesn’t work for just one party, at least when it comes to mortgages.
Sellers need to understand changes in actual buyer cost and the affect on their selling price. Buyers need to understand their cost and how this relates to price in the market over time. (Is a house price rise of 20% fair? That depends on what the cost was at those moments in time)