Oct 17, 2023
As a well-known inflation-proof asset, real estate has been highly sought-after for most of the last two years. But things seem to be shifting.
According to a September 2023 report, almost 60,000 home-purchase agreements were canceled in August. That 60,000 is 15.7% of all August contracts, and is an increase over August 2022's sum of 14.3%.
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Jaime Moore — a Redfin Premier real estate agent located in Reno, Nevada — also added, “I’ve seen more homebuyers cancel deals in the last six months than I’ve seen at any point during my 24 years of working in real estate. They’re getting cold feet."
What’s behind the sudden change in homebuying behavior? Let’s take a look.
Less competition
You’ve probably heard of some house in your neighborhood getting sold for well over its asking price because of multiple offers.
When there are competing offers, people don’t want their deals to slip away.
But when there’s no competition, things can work differently.
“Homes are sitting on the market longer now, so buyers realize they have more options and more room to negotiate,” says Heather Kruayai, a Redfin real estate agent in Jacksonville, Florida.
“They’re asking for repairs, concessions and contingencies, and if sellers say no, they’re backing out and moving on because they’re confident they can find something better.”
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Higher interest rates make housing less affordable
To tame spiking inflation, the Fed tightened aggressively. As of October 2023 the fed funds rate is at a range of 5.25% to 5.50%.
Back in June 2022, inflation hit a 40-year high of 9.1%. Since the Fed's series of rate hikes, inflation has now cooled to 3.7%. Despite reduced inflation and reduced buyer demand housing supply is still low compared to pre-pandemic levels, according to a Redfin New listings are down 14.4% year-over-year as of August.
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House prices started to decrease nationwide in 2022, after hitting record highs. As a result, prices in August 2023 were still high compared to a year earlier. With mortgage rates still relatively high, and supply low, less homeowners are willing to sell.
Time to buy or sell?
Real estate moves in cycles. Given the recent developments, could this be an opportune time to take advantage of the market weakness?
A new survey suggests that sentiment is not exactly optimistic.
Fannie Mae’s Home Purchase Sentiment Index registered a reading of 64.8 in June, marking its lowest reading since 2011. By September the reading dropped further to 64.5%.
Notably, 63% of respondents believe it’s a good time to sell a home, while only 16% of respondents think it’s a good time to buy a home.
Unsurprisingly, mortgage rates are a main concern.
“Mortgage rates persistently over seven per cent appear to be deepening the malaise consumers feel about the home purchase market,” said Doug Duncan, Fannie Mae senior vice president and chief economist.
“They[consumers] also indicated that their personal economic situations are showing signs of strain, including lower year-over-year household incomes and a reduced sense of job security. In our view, all of this points to home purchase affordability remaining a problem for the foreseeable future, which we forecast will keep home sales sluggish into next year.”
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Jing is an investment reporter for MoneyWise. He is an avid advocate of investing for passive income. Despite the ups and downs he’s been through with the markets, Jing believes that you can generate a steadily increasing income stream by investing in high quality companies.
