Be A Better Agent

APRIL 2022 REAL ESTATE MARKET UPDATE

Posted on 04/18/2022 by Matt Hudson

There are four hypothetical scenarios as it relates to interest rates and home values for the current real estate market.

  1. Rates are down and values are up. This is where we have lived with varying degrees for the last 11 years. Significantly, for the last two years.
  2. Rates are up and values are up. This is (most likely) the market condition we have moved into. Many buyers and sellers will be confused by this, as there seems to be a typical correlation between rates increasing and values going down. Remember, we still only have 2500 homes on the market. While plenty of buyers will be forced out of the market because they can no longer afford the payment associated with a higher interest rate at the same purchase price, this only means we are moving from 9 buyers for every property to 4 buyers for every property. We still have demand that outpaces supply.
  3. Rates are up and values are down. There is a reasonable assumption that at some point in the future as rates continue to climb, the supply demand ratio shifts. When this happens we may see a pullback in real estate values. Again, market conditions simply don’t add up to this occuring in the short term.
  4. Rates are down and values are down. You may hear buyers say they are going to wait for values to drop and interest rates to drop. This is simply an economic improbability. In addition to the reasons listed above, if rates go down, we will see another flood of buyers to the market and values jump again.

FOR YOUR BUYERS

There is only one of the above scenarios where your buyers should not take action – #4. If your buyer truly believes rates are going down and values are going down, they should wait to purchase. The obvious argument is the economic improbability of that scenario which says your buyers are just wrong.

For all other scenarios, your buyers will be well served by purchasing now. Here’s why:

  1. If rates increase. With the inventory the Denver marketplace currently has, values will continue to appreciate. This is most economists’ predictions. This means your buyers will continue to benefit from locking in a relatively low interest rate and benefit from increased equity in their homes.
  2. If rates increase, and values go down. If real estate is a long-term play for your clients even if they lose some equity through depreciation, their monthly payment is less at a lower interest rate on a more expensive home, and their lifetime value of interest paid is lower, at a lower interest rate. For example:
    • A one million-dollar property purchased today with 20% down resulting in a loan amount of $800,000.
      • Interest rate of 5% on a 30 year fixed loan
      • Monthly principal and interest payment is $4,294
      • Interest paid over the life of the loan is $746,317
    • The same property that costs $900,000 because of a 10% pullback and values with 20% down resulting in a loan amount of $720,000.
      • Interest rate of 6% on a 30 year fixed loan
      • Monthly principal and interest payment of $4,316
      • Interest paid over the life of the loan is $834,527
  3. And, if your buyers purchase today at what they feel may be elevated interest rates and rates go down, two things occur:
    • values will go up again
    • They refinance to get the lower rate

MARKET STATS

  • Inventory – inventory has increased by about 30% over the last 30 days moving from 1,869 homes early March to 2,453 homes as of April 8, 2022. This is mostly seasonal movement. Reminder, we need approximately 15,000 homes on the market in Denver for the market to be considered a balanced buyer and seller market.
  • Days on market – days on market hit a record low of 7.54 days last week. As you all can feel, the market continues to move very quickly while a shift in market conditions is definitely occurring.
  • Single-family home price – the average price of a single-family home hit $832,000 last week, up from the previous high of $818,000 in week 12 of 2022
  • Listings year to date – this one is very important to understand. There have only been three years out of the previous 12 where the number of listings year to date has been higher than this year. More than 17,000 homes have been listed for sale through the first week of April 2022, surpassing the 16,600 homes for the same time period 2021. More on this below***
  • Contracts year to date – while a significant number of homes have been listed for sale in 2022, a primary factor to the continued inventory crunch is the record-breaking number of contracts year to date. 16,718 homes have gone under contract year to date, outpacing 2021’s 15,881 homes by 5%. And, 13% more than 2019.

***Understand this factor. It is not a lack of sellers creating the inventory crunch, thereby driving up prices. It is a prolific number of buyers experienced through all of 2021, leading to an incredibly low year-end inventory, exacerbated by record-breaking buyer activity year-to-date 2022. This is important to know because the record-breaking buyer activity is going to slow down with interest rate rise. This is not yet reflected in the numbers, rather is our prediction. We will begin to see the impact of modestly slower buyer activity in May and June reports. These numbers will begin to show:

  1. A slight increase in days on market
  2. Fewer offers experienced on properties
  3. An increase in the number of properties experiencing a price reduction
  4. A decrease in the number of homes selling above the asking price

AGENTS SHOULD SHARPEN THEIR SKILLS:

  • Stay in touch with your pipeline – we have talked about this over and over again. You staying in touch with the people in your pipeline with the heart to serve their best interests, not yours, will increase the likelihood they want to work with you and will increase your refer-ability.
  • Setting expectations with buyers and sellers – if you do a remarkable job of documenting and articulating your process, you deepen the partnership with your clients and create freedom for you in your business. Otherwise, your job is to please people emotionally and that is exhausting and unsustainable.
  • Pricing skills – as the market shifts, agents and consumers will be confused. Your ability to understand the objective and subjective factors that contribute to pricing a home will once again become an asset. If nothing else, it will increase your confidence level in your capacity to be a consultant for the consumer.

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