Lumber supplies trending back up, existing inventory finally starting to tick back up, people getting excited again with the good news– are we finally going to see a flattening market?
In this video, I have some good anecdotes that I want to share with you. I also have a couple of thoughts, ideas, and some data, of course, to get you going into September. Hopefully, these will all be able to help you finish out the year strong with whatever you’re doing real estate wise.
1100 Paru St. Open House
Let’s begin with a couple of quick stories, and then we’ll get into some data. This past weekend, my wife and I held this open house at 1100 Paru St. The house is a beautiful, huge Craftsman with this unbelievable corner lot and a big yard. The yard has been featured and awarded in some local yard design shows. So, it went pending for, get this, two days! And just when we thought the market was slowing down, it went substantially over the asking price. I can’t share how much it was yet, but it was a big number. Moreover, it went right before we opened the front door of the open house. The offer came in, and they accepted it. So we just showed it to the open house as a backup.
But that is really fascinating because, typically, the high-end is what’s been slowing down. August was actually really slow for most of the higher-end properties. Many of the mid-tier and some of the lower ones were doing fairly well, although not as well as before. The point is, the high-end was struggling. So it was really interesting to see that happen in such a short amount of time. Granted, that’s one buyer looking for a very specific property. Not to mention, it had significance and meaning for them personally, not just for the buyer pool at large.
There’s a piece of data that I think indicates the strength of our market and where we’re at. And I’ll show you why I think we got there. We’ll try to answer some questions: Why are people still paying so much more over the comp? What’s going on in the market? What are we feeling? So let’s get into some numbers.
Lumber and building supplies are trending back towards where they were pre-pandemic.
Number one, the conversation around lumber and building supplies, in general, is trending back towards where it was pre-pandemic. The supply chain, or supply in general, has come back, as we are now seeing prices come back down for lumber. That is good because it’s got people thinking optimistically about the future. That is both from where the supply is going and from a renovation cost situation. It’s generally, locally at least, got people saying, “Oh, well, things are moving in a good direction.”
However, it doesn’t necessarily impact existing home sales in the very short term. So, that anecdote I told you about that huge sale over at 1100 Paru St. isn’t necessarily impacted by lumber. However, it is a thing in the psychology of anyone in the real estate space. The cost of lumber and building materials coming down is good news for most buyers. It’s creating this little bit of energy and boost that could carry us into the next month or two. On top of that, there are also some other things, which I’ll get into here in a second.
People are still able to leverage their money really far.
Even though mortgage rates have bumped slightly, they are still historically low. That is the second thing I’m seeing, as also shown by the graph below.
People are still able to leverage their money really far. For example, a 20% down payment buys you way more houses than it used to because of that rate. Because that payment for the same amount of money is a lot smaller, your debt-to-income ratio lets you afford more houses. Furthermore, it gives you more purchasing power at the top end. And that’s what I’m seeing people still lean into. However, it may not be quite as furious as it was three to six months ago. But, it’s still something that is affecting the buyer pool.
Existing inventories have finally started to tick upwards from an all-time low.
Another thing that I found really interesting is the inventory conversation. Now, we talked about lumber just a second ago. It is evident that lumber and building costs, in general, obviously directly impact new supply, right? Because if you have to build it where it wasn’t before, you have to get lumber. You have to get materials, and you have to get labor together to build that property.
However, we’re seeing that the existing inventories have finally started to tick upwards from an all-time low. With this graph below, you can see that it is coming back up. And that right there has a lot of people very excited. Through August and even before that, everyone was like, “When’s the inventory coming? When is it coming?” Then, it finally started to tick up.
As a result, it made many slumbering people get out of their summer fog and get back into the market. They are taking advantage of the low interest rates and, potentially, taking advantage of construction costs as well. It’s because if they’re going to move in and do some renovations, their budget just got a little smaller.
So what I'm seeing is that this surge of inventory is bringing a lot of energy back into the market.
It is getting people pretty excited and ready to transact and do some business, relative to buying and selling properties.
Now, a caveat here. September is always a busier and more active month than August. At least locally, you always have a slowdown in August. There’s a narrative amongst most agents that you list after Labor Day instead of before because everyone’s on vacation. That was actually especially true this year because many people were on final vacations before kids went back to school.
School drop-off was weird. There was all the COVID testing, and there was a lot more focus on it. There were more distractions in August this year than in past years. Except for 2020, of course. Also, I think a lot more people just took advantage of getting out and getting into the world again, frankly. On top of that, we did have smoke in the air, which has always dampened the mood in August. Then, historically, September always comes back strong. This year is absolutely no exception.
So where are we going?
The question, though, of course, is where are we going? What does this mean for the future? Well, in the short term, I think we’re going to see a pretty robust September and probably October, too. It’s really interesting in the long term, like I’ve talked about in some of my last videos related to how we got here and where we’re going.
People are paying more now for mortgages than they ever were.
Again, I think this has to do with affordability. Simply put, people are paying more money now for mortgages than they ever were. As you can see from the graph below, we’re up in the double digits over what was going on in 2020. That’s because prices have gone up significantly in rates while they’re still very low and haven’t gone down at that same magnitude. Furthermore, we’ve found ourselves in a place of extreme seller’s market because of limited inventory. This made people compete with one another and drove the prices up and up and up. Well, that’s what I see changing.
Inventory starts to creep up again.
You can see that even if buyer activity is still fairly robust relative to the low interest rates people can get, inventory has started to creep up again. People are putting more houses on the market. And when there are more houses on the market, there will be less competition for each house.
This is especially true if the buyer pool doesn’t grow at the same rate. This combination, in principle, should lower the price. Now, there are some exceptions to this, of course. It will still absolutely stay high in some houses because the best ones always sell for the best prices. On the other hand, the worst houses don’t. But, it all depends on what kind of inventory shows up.
Is it going to be new inventory? Is it going to be stuff that people actually want to buy? Or, is it a bunch of condos that kind of linger and languish, and no one really wants to trade on them for whatever reason? We saw that in the heat of the pandemic. No one wanted condos, but everyone wanted to go to the hills. So the question is, what’s the next trend going to be, locally, in the short term? Then, how about in the long term?
We're probably going to find ourselves in a flattening market.
Ultimately, I think we’re in for a flattening of our real estate market. I don’t see the price appreciation going up and up and further, especially when you consider affordability. How much of people’s average salaries or incomes do they have to put towards their housing? On average, in California, we are at the peak of 55%. It’s never gone above that. We are darn close, though, if we’re not there already. And it is something that will represent the breaking point for most people. They’re not going to go over a certain amount of money to get into a house.
Now, of course, people could restructure and do different things. But that is historically a number we haven’t gone above, and we are there or darn close as of today. So even though interest rates are going down, which they probably will go back up at some point soon, we are probably going to see ourselves in a flattening market.
Will the market crash, though?
Do I think it’s going to crash? Probably not. You never know. Admittedly, I only have a limited amount of data. From what I see on the ground, the amount of cash people are putting down, or the equity cushion, can absorb a 10% drop. Then, couple that with the lending criteria buyers have to jump through. The people getting these mortgages have sound jobs, income reserves, and more, so we’re probably not going to see it like it happened last time.
That being said, there will always be some new input, something new that happens that could shift the balance and the way people interact and engage in the market. Ultimately, that is going to change the dynamic at some point. Who knows what it is exactly? But in general, I believe you should be preparing for a flattening market.
A little more inventory is showing up, and interest rates are going up a little bit, which will take a little heat off everything. Therefore, it’s just going to be these sorts of micro-corrections. Then, over the next six to 12 months, we’ll probably see slower growth and maybe even negative growth. Meaning, prices are going to go down at some point. We’ll see.
We’re going to see a flattening market but people are still ready to compete.
What I see on the ground in the short term is that people are still ready to compete. They are still ready to go after the best houses with gusto. More importantly, they have the finances, the resources, and the interest rates to do so. Long term, I think we’re in for a flattening market but nonetheless, one that will still remain competitive and robust. Maybe just a little less so than we had this year. Fingers crossed for all of us.
I hope my Market Update on the "High Inflation, Disrupted Supply Chain, Low Affordability, and Low Interest Rates--Where exactly are we going?" has helped you.
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