Is the Real Estate Market Bad?

If you have any interest in real estate it is likely you have seen negative reports about housing in the media. Though, are things as bad as they say, and will the real estate market be good or bad in the future? The answer depends on who you are: buyer, seller, renter, landlord, investor or Realtor. So, how is the real estate market for you? Buyers – GOOD and BAD

Gone are the days of 10, 20 even 50 offers on a home which frustrated and demoralized buyers from 2020 until early 2022 when interest rates started rising. The continued financial tightening actions of the Federal Reserve has contributed to the steep rise in mortgage interest rates, thus cooling buyer interest and resulting in a 41% increase in the monthly cost of a typical DC metro area house. As of the end of November, the months of housing supply increased by 50% (to 1.3 months) and the average days on market has increased 54% (from 11 to 17). This is good news for buyers who can comfortably afford the higher monthly cost or who have extra cash to put down and are not maxed out on borrowing money. Yet, these numbers still are quite low historically and the easing is not apparent everywhere in the area. Listings are down 22% from a year ago, so options still are scarce and competition exists, especially for detached houses priced at the lower end for the area. See data charts at the bottom of this article.

In addition, it is likely the market will experience a temporary surge in inventory from distressed properties that were in forbearance due to Covid (foreclosure actions on hold) and from i-buyers liquidating massive portfolios now that they are realizing they are losing money and will face a liquidity crunch. These “instant buyers” like Zillow, Redfin OpenDoor and OfferPad were buying thousands of properties online sight-unseen for near market value through the spring in the hope of a continued rising market allowing them to flip for a profit. Well, that scheme failed miserably – Redfin and Zillow got out of the biz with millions in losses, OpenDoor is holding a massive national portfolio (local too) and is facing a major liquidity crunch and possibly even bankruptcy in the near future. These tend not to be high-value properties, but if you are looking for a $400-$600K house in the suburbs, look for a surge in buying choices and better prices this spring.

Sellers – GOOD

The market is good for sellers especially for houses. Condo buyers are a bit more interest rate sensitive and prices of some condo developments have pulled back or are flat and condos take longer to sell. Overall though, despite the cooling of the demand, average 2022 prices are up 4.6% from 2021! Much of this gain though can be attributed to the beginning of the year when interest rates still were low. Home prices in November 2022 are up only 1.4% from November 2021. One major reason why the market is good for sellers is that their fellow homeowners are not selling! Home sales are down 25% in 2022 compared to 2021 as homeowners are tied to their 3% mortgages, and many now need to be worried about commuting distances again. In addition, there is a fear that has been generated by the media that maybe now is not a good time to sell. Not true though when you look at the data. Sellers needs to be looking at recent prices, as of the end of the summer, and not compare their property value to the pie-in-the-sky prices from the first half of the year. Accurately priced and well-presented properties still sell well in the DC metro area.

Renters – BAD

The rental market has gotten tougher for renters. Rents are up and supply is down due to the strength of the local economy as well as the decision of many homebuyers at the margin to rent instead of buy. Average rents are up about 2-3% over a year ago, and on top of a 12% gain in 2021 and vacancies are down to a relatively low 2.5%. As a result, landlords are offering fewer signing incentives than a couple of years ago and negotiating the rent down is a rare opportunity. In addition, those facing lease expirations are getting rent increase notices more often these days. On top of that, Covid rent relief programs are disappearing, making it even tougher for renters.

Landlords – GOOD

Largely for the reasons the market is bad for renters, the market is good for landlords. Lower vacancy, high local income levels and a strong local economy, lower inventory and the resulting inflation have allowed landlords to raise rents and keep their properties rented. The key to cash flow for landlords is keeping their low-interest financing from years' past. Refinancing at today’s 6.5% interest rates will make profitability more difficult. In addition, the soaring cost of renovations can negatively impact those landlords who need to make significant updates to their properties.

Investors – BAD

Investors are facing some headwinds currently, but they could see opportunities in the near future. The risk of prices continuing to drop weighs on an investor looking to buy now. The high cost of financing makes positive cash flow on a rental property purchase more difficult. Inflation has caused the price of almost all renovation inputs to increase, while the regulatory process for permits and inspections still is a lot longer than it used to be, impacting short-term profitability. There are not a whole lot of distressed homeowners out there due to regulations put in place after the Great Financial Collapse of 2007, so investors cannot count on a steady flow of foreclosures. A bit of backlog from mortgage forbearance and the flooding of the market by the foolish i-buyers might give investors more opportunities in the spring and summer of 2023. That said, there always are deals to be found, it just takes time and ingenuity these days.

Realtors – BAD

People have been streaming into the real estate business since the market accelerated in 2019 and then especially after the Covid lockdowns with people losing their jobs. At the same time the market began to reach a boiling point with so much financial stimulus driving down rates and creating a buying frenzy, many people were enticed by a vision of easy money as a Realtor. “If a house is going to sell in one day sight-unseen, any fool can sell a house and make a lot of money, right?” Reality was a bit different for a lot of newly licensed Realtors as it could take many months of multiple offers to secure a house for buyers and the competition to get a house to sell reached extreme levels. When the market crashed in 2007, the nation lost about 340,000 Realtors (-30%) in the bear market through 2012, when the total hit a low of around 1 million Realtors. Then the market began to improve and the number of Realtors now has grown to a record 1.6 million - a 60% increase! Also, there are about 3 million total real estate “licensees” while only about half can call themselves Realtors as members of the National Association of Realtors. November 2022 compared to November 2021 reveals: closed sales are down 42%, pending sales are down 42%, new listings are down 22%, showings are down 42% and prices are flat at a 1.4% increase. This is the perfect storm of bad news for Realtors in a “stagflationary” environment. This trend likely will continue through 2023 and possibly into 2024, which will result in many dropping out of the business again. The median gross income of a Realtor nationally was $54K in 2021, and after expenses this puts the majority below the poverty line. While there is no easy money, those with a good work ethic who work hard and smart, and are willing to learn and show persistence will succeed anyway, as they do in any industry.

Christopher Jones

Your Realtor

202-441-7008

Data from Bright MLS, the DC metro area multiple listing service and Lisa Sturtevant, Bright MLS Chief Economist. Realtor data from the National Association of Realtors.