Our Extraordinarily Strange, Not-So-Good, and Very Illiquid Real Estate Market

Several extraordinary milestones were hit recently in the real estate market that doesn’t seem to make a lick of sense when put together.

For starters, the average 5-year ARM broke 8% for the first time since the mid-1990s. (And the 30-year fixed mortgage is just barely less than that, at 7.946% as of the date of this writing.)

Normally, one would think that if rates more than doubled over the course of 18 months, the real estate market would take a big hit. 

Well, nothing about this market is normal, as one would be wrong about that prediction. In fact, in July, national home prices broke out of their very short-lived “slump” and are again positive year-over-year. According to the Case-Shiller Index, in July 2023, the index came in at 310.16, up from 307.14 in July 2022 (308.3 in June 2022 was the previous peak). The “slump” (if you can even call it that) looks like this:

The National Association of Realtors’ (NAR) data goes through September of this year and found that sales prices are up 2.8% year over year, with a median home going for $394,300. The period of price declines (at least until now) was extraordinarily short-lived.

It should be noted, of course, that these are just nominal prices. In real terms (i.e., when adjusted for inflation), real estate prices have fallen substantially more. If we use an inflation calculator, the value of a dollar today would have been worth only about $0.91 at the beginning of 2022. Thus, in real terms, real estate has declined almost 10% since rates started to increase. 

Even still, given where interest rates are now, it’s still astonishing how well real estate prices have held up.

Why Hasn’t the Market Collapsed? Or Has It?

In August of last year, I predicted the real estate market would not collapse for multiple reasons, including solid lending practices, general inflation, a housing shortage, and, in particular, a lot of homeowners with low-interest, fixed rates. As I stated:

“[T]here are fewer adjustable-rate mortgages than there were in the years before the [2008] crash. As The Financial Samurai points out, only 4.7% of mortgages taken out in 2021 were adjustable-rate mortgages! The rest were fixed-rate…” 

“My personal home mortgage is at 3% on a 30-year fixed rate. Obviously, I’ll never refinance that one. Indeed, many people now have incredibly low-interest loans fixed for 30 years.”

What this has caused is a sellers’ strike, where few people are willing to sell and give up those great, fixed rates to buy a new home with an 8% mortgage.

(On a quick aside, if you have a sub-4% mortgage, you almost certainly shouldn’t sell. If you have to move, rent your current home out, and then rent where you are moving to if buying there doesn’t make sense.)

What started as a frost over the real estate market has become a deep freeze. Just look at the number of existing houses sold:

This is the type of sales activity (not prices, obviously) we saw during the Great Recession.

According to the NAR, existing home sales “waned 2.0% from August to a seasonally adjusted annual rate of 3.96 million in September. Year over year, sales dropped 15.4%.” But if you go back to January 2022, existing home sales are down by over a third.

Months of supply crept up from 3.2 to 3.3 months from August 2022 to August 2023 (it was only about one month in 2021). But this has happened despite the number of houses being sold having fallen through the floor.

The existing inventory of homes for sale sits at 1.1 million, down from close to 1.25 million in the middle of 2022. (It got over 4 million briefly during the height of the Great Recession in 2008.)

We have been selling a few properties recently to raise additional funds, given that refinances are not an option. Several months ago, while the market wasn’t hot, we were still generally getting those houses under contract in a week or two. Now, it’s almost completely silent. We’ve been hearing this is a common experience, at least where I’m at.

In all likelihood, this is at least partly due to psychological factors for potential buyers. With rates at or near 8%, many buyers want to wait for at least a month or so to see if they tick back down. That was my experience when rates first hit 6%. But this is just a feeling—it’s no sure thing. Just like it’s no sure thing that rates will go down from here despite the Federal Reserve signaling it is going to “pause” future hikes.

Where Are We Going?

Federal Reserve Chairman Jerome Powell recently stated the current fiscal path for the United States is “unsustainable.” With record-high peacetime (well, sort of) deficits and high interest rates requiring ever-more-exorbitant interest payments, something’s got to give relatively soon.

And the combination of high prices and high interest rates has made housing as unaffordable as it has ever been in American history. One analysis back in late 2022 (when rates were more like 6%) concluded, “Housing prices have to decline more than 40%” for housing to become affordable again. Hopefully, it will just be rates that decline.

Economic predictions don’t have a particularly good track record. But for what it’s worth, the NAR expects mortgage rates to be back around 6% by next year. On the other side of things, Deutsche Bank is almost sure there will be a recession. 

Personally, I have a hard time seeing how we get out of this without at least some economic pain. But you never know for sure.

The Bottom Line

For now, the most important thing to understand is that this market is illiquid. Few people need to sell. So, for the most part, they don’t. 

If you need to sell to raise funds, don’t delay, as it could be a while before your property moves. It would be wise to offer financing concessions, too. 

Refinancing is basically a nonstarter, and thereby BRRRRing is very difficult, although there are certainly still opportunities subject to deals. With flips, expect a longer holding period, and it would be wise to stand out, i.e., really make the house pop. 

And for the love of everything good in this world, if you have a fixed mortgage from before the middle part of 2022, hold on to it for dear life!

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.