The Catch 22 of 2023 Continued
A friend of a friend called the other day to talk about the market, sensing an opportunity to exchange a property he’s owned for a long time into something better, closer to the ocean. Not surprisingly, he assumed that prices on the Coast have taken a big hit since interest rates more than doubled in the last year and that it might be the perfect time to get a steal!
He was partly right…a rapid rise in rates affects affordability which in turn often shrinks the number of buyers who are either willing or able to buy a house. And it’s not a big leap to assume that if demand drops precipitously, then prices usually fall right along with it. Only that’s not what has happened!
Welcome to the Catch 22 of 2023! Yes, interest rates have risen and demand has shrunk – by a lot. Through the first 6 months of the year, the # of sales is at an all-time low – almost 30% lower than last year at this time. (2022 went on to record the fewest home sales ever.) And with the exception of the outlier months of Feb/March 2022, when the market flipped a switch into hyperdrive, the median price for SFRs is still hovering in record territory ($1.3m), much to the chagrin of would-be investors.
So why the high prices, despite significantly less buyer demand? Simple – 2023 is also on its way to setting an all-time low for the fewest new listings – ever! It seems Sellers are avoiding the market in record numbers (new listings are also down 30%) and the resulting crimp in the supply chain ensures competition for the few good places still coming on. That competition drives prices!
What does the crystal ball say about the 2nd half of 2023? Market forces are at a stand-off right now. Both supply and demand are stuck in low gear, grinding against each other in a self-reinforcing loop. If the market is going to change anytime this year, either demand or supply or both are going to have to find a way to kick into higher gear.
Last week, we looked at the main factors with the power to increase affordability and juice the number of buyers entering the marketplace: lower interest rates, jobs, stocks/IPOs, remote work trends and tanking prices. And there’s nothing on the horizon to suggest that any kind of buying spree is imminent. What about the supply side of the equation? What’s going to unlock the “shadow inventory” of pent-up listings that are presumably out there, lying in wait, mysteriously biding their time?
Next Week: Looking at the Four D’s (death, divorce, downsizing and distress). Is there any supply out there?