Why are prices not falling??!!
I always explain to my buyers that the most important metric to look at when they are considering buying a house is their monthly payment. Most people are very focused on the price tag, but looking at the monthly payment allows you to take into consideration both the purchase price and the interest rate. It also helps you focus on the important matter: can I afford it? And if yes how much of my purchasing power does it take away from other things every month?
With interest rates more than doubling over the last 6 months, one would easily assume that prices would go down as a result. It’s simple math…
If nationally prices have declined , our area doesn’t seem to be affected by interest rates as much. Here is why:
General level of wealth amongst buyers: The wealthier the buyers, the more cash they bring to the table. Proportionally, a wealthier buyer won’t be impacted by interest rates as much.
The real economy is booming: if houses went up in price, income also did and there is generally speaking a lot of money out there.
Buyer psychology/motivation: After missing out on historical appreciation, buyers are willing to make concessions when they buy so they don’t miss out on the next run in values. They also fear becoming locked out of the market. For example, somebody who was looking into Glenwood in 2020 because they thought Basalt and Carbondale were too expensive, and was disqualified as a buyer in Glenwood ever since because prices went up so quickly, will likely now look at New Castle as their best options. They will aggressively go after purchasing a home there by fear of missing out on New Castle too, even though 3 years ago New Castle wasn’t even on their list. This might sound like an emotional decision, but it is a real life market driver. It’s actually one of the most important ones.
Rock bottom inventory: With little to no inventory, the competition amongst buyers is fierce. With several potential buyers for each listing, it’ll be required from them to go above and beyond to outpace the competition. With only a handful of listings, a handful of buyers willing and able to buy them at a high price is enough to maintain sky-high values.
Cost of construction: The solution to low inventory is usually to create more. New construction could bring oxygen to this market if… It wasn’t so expensive to build. In our area, it will cost anywhere from $450 to $1,000 or more a square foot to build. Even for somebody willing and able to pay that price, the process to get a building approved and built is long and grueling. This leaves most buyers with little to no alternative other than compete to buy what’s already built and for sale.
How long will this last?
This is the million dollar question. The pandemic came as a complete shock to the system. Housing became number one on people’s priority list and the abundant liquidity created a cycle of inflation that the Fed is still trying to tame down. If a black swan event such as a liquidity crisis doesn't happen to shake up the market, there is no end in sight for low inventory and high prices. Especially in our area where fundamentals (demography, attractiveness, lack of buildable land) are strong, it will take a lot to change the current unbalance between supply and demand.
What should you do?
There is no market that’s easy to navigate. They all present challenges and if this one is extra hard to wrap your head around, there are still ways to successfully navigate it.
Stay conservative: With the Fed trying to cool the economy down and financing being expensive, taking on too much leverage is not a good idea. If the Fed achieve their goal, there will be some parts of the economy that will slow down considerably. You don’t want to get the double whammy of taking on expensive debt and seeing your income go down.
If you are in a position to buy, with a good down payment and a debt to income ratio that’s reasonable, focus on real estate that has elements that make it unique and attractive. In our area, buying a home that has privacy, views, riverfront etc… It will come at a price but it will also shield you from market shifts.
If you have real estate to sell, to give in to the narrative that a crash is coming. Demand a fair price for today’s market. There is no discount to be given right now, despite high interest rates.
Reach out if you need advice to buy or sell!
