I recently wrote a post looking into how the market was trending towards a dynamic shift from a sellers market to a buyers market, and so, given that about a month has past since then, I wanted to take a moment and look at the progress of some of the assertions made and help to gauge the status of the current market.
There are a lot of signals out there to support the claim that the market is shifting to a buyers market, such as the Fed alerting us that continued interest rates spikes are set to take effect this year and the trends of mortgage interest rates are mirroring that steady increase as well.
Tax Law Updates
As a recovering tax accountant, I would be remiss if I didn’t discuss the impact of changes to the US tax law on the buyers market shift at the start.
In essence, the new tax law that is taking effect as of 2018 will cap the property state and local tax deduction at $10,000 for the year. What this means is that states with high property taxes and high state income tax rates will notice changes in the buying habits of its residents the most. Based on this tax law change, it will be less advantageous to buy properties in certain states due to the personal tax liability that those homes might bring with them, seeing as the deductions most investors and home owners used will be limited.
In addition, the mortgage interest deduction will also be capped at $750,000 for homes bought after December 15. These are two changes that will definitively and drastically impact the state of the housing market and help push us towards the buyers market.
Interest Rate Increases
The last time the interest rate on a 30 year mortgage was at 4.59% or higher was in May of 2011, when it was 4.64%.
Back in May of 2011, the Fed funds rate was about 0.1%, compared to the nearly 2% that it currently resides at. What does this tell us?
With this substantially increased Fed rate, along with the proposed increases scheduled to still come throughout this year, the market is only going to get more expensive to borrow money in, which will limit the number of potential buyers on the market and driving us more quickly to a buyers market. For example, if it costs the banks more to borrow funds, they will respond by passing on those increases to their consumers, meaning that it will cost more for individuals to borrow money.
Since we have already started to see these rates increase, it would make sense to conclude that the changes in the market should be starting to take form. However, when we look at the initial data, we tend to see the signs of a seller’s market still.
Therefore, let’s reanalyze the data to see if we can determine what is actually taking place.
Supply of All Homes for Sale
Based on our previous article, the supply of all homes available for sale was trending down, with low points in November and December of 2017. However, the start of 2018 saw a jump in the number of available homes.
In fact, total homes available for sale has been increasing steadily in 2018, which matches up nicely with seasonal trends noting that summer has traditionally been the peak.
What this tells us is that we can expect the market of homes available to buy to expand as we continue to progress into the year. However, look at the comparison to last year. We are seeing less total homes available for sale compared monthly year over year.
This would lead me to believe that the data we saw from the two residential construction companies, where we noticed a significant downward trend in their stock prices to open up 2018, has held fairly true. We are noticing less total homes available for sale.
However, this does not mean that the prediction of a market shift is incorrect, as this data is only a piece of the entire equation.
Median Days on the Market
The next primary driver that I wanted to inspect was the median days that a property is remaining on the market. In general, in order to see a systematic shift in the status of the market, we would want to see the median days on the market to be increasing, which would signify that there is more control in the hands of the buyer.
However, what we are seeing is a steady and rapid decline in the median days on the market.
This would appear to go directly against the main hypothesis of a change to a buyers market, as this is showing homes are selling faster than they have since 2012.
The problem with this assertion though is that it doesn’t take higher level thinking into account.
According to multiple sources and as mentioned above, the Federal Reserve has increased the interest rate on a federal level, and they have also announced that they will be increasing the rate four additional times this year. Based off of an extremely low 3.8% unemployment level nationally, the Fed has decided that additional rate hikes will be necessary to combat inflation.
This will have a direct impact on the mortgage rate, pushing the mortgage interest rates up throughout the course of the year. Based off of this, the median days on the market tends to make more sense, as we are beginning to see the market react early to later changes set to take place to the market economy.
According to Joel Naroff, the president of Naroff Economic Advisors, the prospect of higher mortgage rates is compelling more prospective homebuyers to make a decision and purchase the home they have been considering in order to get the purchase finalized before another interest rate spike:
Higher mortgage rates could push buyers off the fence — increasing demand, increasing prices and increasing home equity so that more people can sell their homes
When we consider this, we begin to make sense of the data that we have in front of us.
Homes are staying on the market for less time than we have seen in the past few years as people are trying to take advantage of the better opportunity that exists currently. The median sales price of homes reflects this as well, as we are seeing a steady increase in the cost of homes, and we continue to see more properties sell for over the asking price.
Couple this information with some data from the US Department of Housing and Urban Development and we can see that the total homeownership percentage in the country has increased when comparing Q1 of 2018 to Q1 of 2017, going from 63.6% to 64.2%.
What this is telling us is that in Q1 of 2018, more people are starting to own homes than this time last year, even though the total number of available homes for sale is actually a little less than it was comparatively.
Now tie in the fact that homeownership rates among the most important demographic for real estate, under 35 years old group, has been historically low over the past few years, noticing a slight dip in Q1 of 2018.
What this data tells us is that homeownership is being delayed, as we see a steady rise in homeownership over the same time period for the 35-44 year olds.
Even though the number of potential homebuyers appears to be in slight decline, the number of new listings is steadily increasing:
Is a Buyers Market Coming?
The changes to the Fed funds rate signal a change to a buyers market upcoming, as does the change in the tax laws that lessen the benefits of owning a home. Add this to the fact that there are more new listings on the market than previous years, the number of potential home buyers is decreasing coupled with the sudden rush of home purchases, the market is starting to transition to a buyer’s market. We are in the midst of witnessing a final rush toward home buying prior to watching the market shift to a buyer’s market as there will be more inventory available than there are prospective home buyers.