The last two years have been either a blessing or a curse in the housing market. If you are a homeowner, the sustained price growth has been a blessing as valuations have risen over 20% from the same time in 2016. Families that have listed their home for sale have been able to expect multiple offers on their homes from buyers eager to enter the market. Many times these homes have sold at or above the listing price. On the other hand, many first time home buyers have seen the market over the last 2 years as a curse. With home values rising rapidly with no end in site, there has been heavy competition. Many buyers have not been able to buy in their desired areas and many have left the market dejected after being beat out on multiple houses by competing buyers. As the prices have risen steadily many potential buyers have felt like they missed their opportunity and home ownership will be forever out of their reach. Recently however, their are a number of factors that just may finally shift the odds back in the buyers favor. Here at The Reeves Team we are going to break down the reasons we may be in for a shift from a sellers market to a buyers market.
Are we in a perpetual sellers market?
The short answer to this question is No. A common phrase you will hear in wall street is “Trees don’t grow to the sky”. The meaning behind this is simple, If you watched a tree grow from its youth you would see it grow at a steady rate. If you see a tree grow 2 feet a year for 10 years it would be rational to assume the tree will continue growing forever and after awhile it would reach all the way to the sky. As we already know this isn’t the case, but many people seem to use that reasoning when looking at the housing market. Since 2012 we have seen sustained growth in the Gilbert housing market. That is 7 straight years of nearly 10% gains each year. When you see homes appreciate this consistently for that amount of time its easy to think it will continue going up forever. Unfortunately, we have a fairly recent example of how volatile the housing market can be when we all endured the 2008 financial crisis. It is unlikely we will see any steep corrections like the one we witnessed a decade ago, there is a strong possibility prices could begin to decline slowly giving buyers much more leverage when negotiating for a new house.
What are some of the reasons we could see a slowdown in the housing market?
There are a number of reasons we could see a slowdown, and not all of them have to come to fruition to make the slowdown a reality. The biggest factor to consider is rising interest rates. The rates a homeowner has to pay when getting a loan on a home can dramatically affect the mortgage payment each month. Rates were brought down to almost zero after the financial crisis in 2008 and stayed there for quite some time. Borrowers were able to purchase homes where a large portion of the payment was going to principal and less to interest, this allows them to pay more for homes and stay within budget. Because interest rates were low and stayed low for a long time prices have marched steadily higher. Now that the federal reserve has began to raise interest rates and home prices are at or near all time highs it is squeezing potential buyers out of the market. When there are less buyers that means sellers will need to compete harder to land one willing to pay the going rate for their home. We are starting to see home homes listed for sale, but currently its only a slight uptick. If more homeowners begin to worry about falling prices and begin to list their homes we could see even further price reductions.
How bad could it get?
This is a very interesting time not only in housing but also in the overall economy. Not only have we had extremely low interest rates over the last decade, we have also had quantitative easing in which the federal reserve pumped billions of dollars into the economy annually. The federal reserve has not only raised interest rates it has also stopped its policy of quantitative easing. The Fed still has trillions of dollars on its balance sheet that it now needs to sell which could further put pressure on the overall economy. We also have record low unemployment levels and a growing economy which helps offset some of the negativity in the markets. We could see a temporary dip and then a march higher or we could possibly see a longer more protracted sell off leading to lower prices over the next couple of years. One thing is pretty clear, we wont see anything nearly as bad as we saw in 2008 when the sub prime mortgage rates took down the whole economy.
So what do you think? Will we see a buyers market over the next several quarters or will we continue to march higher as we have done over the last 7 or 8 years? Leave your thoughts in the comments section below.