Spring!

Today, the last rains of the season are passing through (if the meteorologists are to be trusted). What better time to look back on 2023 (in wonder, awe and even shock), and to look forward to spring, summer and fall 2024 (in hopeful anticipation). Easter (a few days away) and other springtime festivals are a celebration of rebirth, so I am celebrating the early days of the rebirth of the real estate market!

LAST YEAR

The real estate market went into deep freeze last year, mostly due to shifts in the mortgage interest market.

* The Federal Reserve raised interest rates 11 times over the year and a half that began in last summer 2022. This ricocheted through the market and ultimately moved average mortgage interest rates from somewhere in the 3% range in mid-2022 to roughly 7.5% in November 2023.

* Homeowners who purchased or refinanced their homes during those happy 2%-3% interest days were not inclined to sell their homes and let go of their fantastic mortgage rates, only to dive back into the mortgage market and buy a new home at the higher interest rates.

* Homebuyers who'd been looking for a Bay Area home for what felt like eons were cut out of the market by the spike in mortgage interest rates.

-- It's hard to overstate the effect of soaring mortgage rates on buyers' ability to buy a home: To buy a $1.2M home - not an anomaly in the Bay Area housing market - often takes a 20% downpayment, meaning that buyer needs $200,000 in cash and a mortgage loan for $1M. A $1M purchase loan back in June 2022 might have carried an interest rate around 3.5%, which meant that buyer would have a monthly mortgage payment of $4,490. With rates spiking to 7.5% by late 2023, that $1M mortgage loan suddenly carried a monthly payment of $6,992. An extra $3500/month is more than enough to cut a lot of buyers out of the market. --

The outcome of all of these forces was that the Bay Area experienced an historically low level of "inventory" (homes for sale). The inner East Bay market, as one example, had the lowest number of recorded home sales in all of the years records have been kept (for 28 years) and possibly for a number of additional years, beginning well before records were kept. The buyers who remained in the market were left to fight over the most paltry assortment of homes imaginable. Despite being utterly beaten up by high mortgage interest rates, buyers who stayed in the market were forced to compete fiercely to try to capture one of these few elusive properties as their new home. As a result, the spike in mortgage interest rates did not cause a corresponding drop in prices. Buyers simply paid a lot more for the homes they purchased. 

Those sellers who sold their homes last year enjoyed a remarkably competitive real estate market. Many sellers wouldn't even entertain the idea of selling, because they didn't want to join the pool of buyers in search of their next home. Those sellers who were able to sell and buy a next home without being hurt by the mortgage rates (perhaps paying a high percentage of cash, or moving into a second home they already held in another area) did quite well.

Yes, average home prices actually increased year-over-year, if you compare December 2023 to December 2022. This is in spite of the extremely high mortgage interest rates and their remarkably profound effect on monthly housing costs for buyers in 2023.

THIS YEAR

Fast forward to spring 2024 and mortgage interest rates still not subsided to the 4.5%-5.5% levels that many economists have been predicting. We have had some downward movement, then rates have bounced back up although not quite as high as last winter: A jumbo mortgage is now in the high 6% realm.

While rates are not yet low, but we can all be grateful for the 0.5% drop in mortgage interest rates from last winter's rates. Even more than that, we can be grateful that the Fed is looking for confirmation that inflation is under control, and once they get enough good news on inflation, they've promised to drop rates.

LOOKING UP

Last year, "looking up" referred to the direction in which interest rates were headed. This year, "looking up" refers to hopes and expectations that the bad days of soaring interest rates will soon be behind us. Many buyers and sellers are placing their hopes in these hopes and expectations, and the real estate market has already picked up steam this early spring. I suspect that many buyers are looking to buy under the assumption that they'll be able to refinance their high mortgage interest rate later this year.

Sellers are expecting a drop in interest rates to bring a swarm of new buyers into the market. To some extent, this is an obvious expectation based on infallible logic: If high mortgage rates pushed buyers out of the market, then low interest rates will bring a lot of buyers back into the market. The challenge is that there are so many sellers trying to time the market, and hoping to list their homes for sale just as interest rates come down and the swarms of buyers return. I expect there will be bursts of new listings, and the market will be a bit uneven for a while: With a ton of new homes for sale, tracking the drop in interest rates, there may be less buyer competition for each property because there will be so many other properties to choose from. This could actually reduce the overall rate of housing price increases.

Once things balance out a bit, I anticipate a return to a more reasonable real estate market:

* A market in which buyers can afford to buy

* A market in which sellers are not held in "golden handcuffs" (historically super-low mortgage interest rates) to such an extent that they simply refuse to sell

* A market in which enough sellers are selling and enough buyers are buying that the market can carry on and people can base their housing decisions a bit more on personal preference and desires, and a bit less on stark financial pressures

I look forward to this market. This is my version of "looking up"!