– Market fundamentals that have kept property values stable through 2023 may be changing
– Demand has dropped about 40% since the beginning of 2022, while supply has dropped about 45%
– Prices have remained relatively stable, up about 3% year over year, while volume is down 16%
– New listings have exceeded 2022 levels for the first time, potentially leading to increases in inventory and total supply
– Demand continues to deteriorate and is now at the lowest point since the mid-1980s
– Supply and demand trends suggest downward pressure on pricing, but prices are unlikely to turn negative on a year-over-year basis through the end of 2023
– Prices went through a mild correction in Q4 2022 and Q1 2023, but have since recovered and turned positive
– The potential for a modest price correction in the coming months poses a risk for investors but also creates opportunities for good deals
– Be careful and diligent, but keep an eye out for good deals during the cold winter months.
The market fundamentals that have kept property values stable through 2023 may be starting to change.
Since the beginning of 2022, as interest rates have risen, supply and demand have dropped somewhat proportionately. From a cycle-high in 2022, demand has dropped about 40%.
But supply has actually dropped further—about 45%. When this happens, prices can remain relatively stable while volume drops. This is exactly what we’re seeing—prices are up about 3% year over year, while volume is 16%.
A Look at Supply and Demand
In just the last few weeks, supply and demand are starting to move in opposite directions. One of the best lead indicators for housing supply is new listings (how many new properties are listed for sale each month).
Looking at the graph, you can see two critical things are happening. First, new listings, which have been well below 2022 levels all year, just exceeded 2022 levels for the first time. Secondly, new listings typically decline seasonally toward the end of the year. This year, that’s not happening—or at least not yet.
Of course, this is a very recent trend, but this could lead to increases in inventory, days on market, and total supply. In the chart from Redfin below, you can see that active listings (how many properties are for sale in a given week) are following a very similar pattern. Active listings have been climbing for months now and are not currently showing any sign of seasonal declines.
Increasing supply doesn’t necessarily mean there will be downward pressure on pricing if demand follows the same trend. The problem is that demand is going in the other direction. According to the Mortgage Bankers Association, demand continues to deteriorate and is now at the lowest point since the mid-1980s.
What’s the Effect on Pricing?
When you look at recent supply and demand trends together, we should all expect downward pressure on pricing—at least on a national level.
Although these indicators suggest prices will be pushed down a bit, I find it unlikely that they will turn negative on a year-over-year basis through the end of 2023 because prices corrected at this time last year. So when comparing 2023 numbers—even if they come down a bit in the coming weeks—to 2022 numbers, they are likely to remain positive.
As you look at this chart, you can see that prices were in a mild correction in Q4 2022 and into Q1 2023. Then, prices recovered and eventually turned positive this summer.
So, while I think it’s unlikely we will see negative prices on a national level this year or even in the beginning of 2024, the real test will come in March or April 2024. This is the time of year when prices typically start their seasonal decline. Yet since we’re seeing some indicators buck their normal seasonal patterns, there’s no guarantee prices will take off next spring like they normally do.
The potential for a modest price correction in the coming months does pose a risk for investors. But it also creates opportunity! Remember that rising inventory and days on market shift the balance of power in the market. When there are more sellers than buyers, the buyers who remain have leverage and negotiating power—this is often how great deals are made.
The Bottom Line
My advice? Be careful and diligent, but keep an eye out for good deals—I suspect we’ll see more opportunities during the cold winter months.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
Property Chomp’s Take:
The stability of property values in the market has been a key factor in the real estate industry for the past few years. However, recent changes in market fundamentals suggest that this stability may be starting to shift.
Since the beginning of 2022, as interest rates have risen, both supply and demand have experienced a decline. Demand has dropped by around 40%, while supply has dropped even further, about 45%. This drop in supply has resulted in relatively stable prices, with a year-over-year increase of about 3%, despite a 16% decrease in volume.
In the past few weeks, supply and demand have started moving in opposite directions. One of the leading indicators of housing supply is the number of new listings each month. Interestingly, new listings, which have been below 2022 levels throughout the year, have recently exceeded those levels for the first time. Additionally, new listings typically decline towards the end of the year, but this year, that decline has yet to happen.
This recent trend could lead to an increase in inventory, days on the market, and overall supply. On the other hand, demand is deteriorating. According to the Mortgage Bankers Association, demand is at its lowest point since the mid-1980s. This divergence between supply and demand could potentially put downward pressure on pricing.
When looking at the current supply and demand trends, it is likely that there will be a downward impact on pricing, at least on a national level. However, it is unlikely that prices will turn negative on a year-over-year basis through the end of 2023, as prices corrected during the same period last year. Even if prices do come down slightly in the coming weeks, they are still likely to remain positive when compared to 2022 numbers.
Looking at the chart, it is evident that prices experienced a mild correction in late 2022 and early 2023, but eventually recovered and turned positive during the summer. While negative prices are unlikely to occur on a national level this year or at the beginning of 2024, the real test will come in March or April 2024, when prices typically start their seasonal decline. However, with some indicators bucking their normal seasonal patterns, there is no guarantee that prices will follow the usual upward trajectory next spring.
The potential for a modest price correction in the coming months poses a risk for investors. However, it also presents an opportunity. Rising inventory and longer days on the market shift the balance of power in favor of buyers. In a market where there are more sellers than buyers, those buyers who remain have leverage and negotiating power, creating the potential for great deals.
In conclusion, it is important to be cautious and diligent in the current market, but also keep an eye out for good deals. The cold winter months may present more opportunities for investors. By staying informed and working with an investor-friendly agent, investors can navigate the changing market and take advantage of potential opportunities.