Benjamin Franklin, a Founding Father and diplomat lay dying at the age of 84. After a long and illustrious life marked by significant achievements; he now was at home, trying to rest and having difficulty breathing. His daughter, attempting to aid her father as his life faded from him, encouraged him to sit up and recline instead of laying on his back… She told him that it would help him “breathe easier.”
To which, this gentle genius of a man replied, “A Dying Man Can Do Nothing Easy…” and then died.
Many times, I think of this story and how it relates to our current real estate market. If we to apply this parable to today’s housing outlook, a contemporary headline might read “A Dying Housing Market Can Do NOTHING Easy.”
A Dying Housing Market…
I think we can all safely agree that whatever remnants of the “housing boom” of 2020-2021 are now meeting the “Stone Wall Of Inflation.” Gone are the days of artificially low interest rates, multiple offers in hours, and waiving appraisal contingencies. The market today is now returning to what should be “normal.” Anyone who suggests that the market is substantially the same today as it was even as short as six months ago is selling 100% pure “hopium”
However, what are the effects of all the unrestrained “printing” of trillions into our economy? Especially with lower interest rates? Especially over time?
The answer to this question is what we see before us today. Home “values” have shot up over 30% in most markets, 50% in others. Homes that were purchased with extremely low (think 2%-4%) mortgage rates. Homes that were purchased as secondary or investment homes. All of these are effects of two things. Unrestrained and uncontrolled inflation of the currency (think money printing) and artificially low interest rates.
What happens when you remove those two items? When you remove “money printing” and increase the interest rates? Does this “kill the dying man?” No. Not necessarily.
While the housing market and it’s relationship to rising interest rates are well known, what is not often considered is the effect that rising interest rates have on the available buyer pool. In short, rising interest rates create demand destruction.
It is often reported that “This market isn’t like 2008. We don’t have subprime lending like that anymore”
While it is true.. this real estate market “isn’t going to be like 2008….” It is my contention that it will be far worse.
Can Do Nothing Easy…
In a rapidly declining, or flattening market, a homeowners set of problems changes entirely. In an upward trending market like we have experienced for the past few years, Home sellers had grown accustomed to aberrant market conditions. It is absolutely abnormal for a real estate market to have extended periods of time where home buyers made multiple, over market offers. It’s understandable therefore for the typical homeowner in 2023 to long for days gone by. However, in the real estate market of 2023, your options, and problems have changed.
Biggest Problem #1. Closing The Transaction
The biggest problem you will face is actually closing the transaction.
There is a reason for this. While it is indeed difficult to find a ready, willing, and able buyer to purchase your home in a regular market; it is another thing altogether to have that same buyer actually inspect, appraise, and close the transaction. There are a multitude of reasons for this.
First, as we mentioned before, “demand destruction” is a real factor that is actively taking place across the United States. This is evidenced by the increasing amount of inventory, coupled with reduced buyer demand. The inventory is comprised of remaining unsold homes, as well as homes coming on the market. As there are more and more homes on the market, they are remaining on the market longer. Buyers see more and more signs on the streets, they see more open houses, and this resulting in lower average sales.
Second, we live in a hyper connected world. Buyers are aware of all the articles, all the MSM interviews and blogs about the housing market. Their parents, friends, co-workers and others are all influencing their decisions to buy a home. Add to that the rising inflation, interest rates, and uncertainty about the real estate market.. buying your home at your price would be a challenge even if they wanted to. There are simply too many homes to choose from, and the average interest rate today is 7.165% for a 30 year fixed loan, and that is with a credit score of 698. Since the average credit score is that, the interest rates have risen from over 5% in a year.
Thirdly, as these mortgage interest rates rise, (which they undoubtedly will) the proposed payment that the buyer rises exponentially. For an average home in America ($428,700), a 1% interest rate rise can increase the buyer’s monthly payment by hundreds of dollars. As if this wasn’t bad enough, these rising interest rates not only disqualify or discourage potential buyers from your home, it raises the specter of last minute cancellations.
Biggest Problem #2. Indecisiveness
When you decide to place your home for sale on the real estate market of today, one must be prepared for indecisiveness. Not only indecisiveness on the part of the potential homebuyer, but on yourself as well.
It’s bad enough to have a buyer cancel on your transaction and walk away at the end leaving you nothing in your hands but earnest money. It’s even worse to have your home on the market for 6 months, interrupting your lifestyle and family, while your dream goes by the wayside. Ultimately having your home expire from the market unsold.
One must decide from the outset to sell their home. Once you make that decision, you are placing a “product on the market”. I hate to sound cold like that, but it’s really that simple. You no longer have a “home.” You have a “property” that is a “product” just like the thousands of other properties on the market. That does not mean your home isn’t special to you, or have good memories! It simply means that you must now view your home in a different way. Much like how you would wash your car prior to sale.
It sounds simple to say “decide to sell” but it’s not that easy. Sometimes homeowners do not want to hear what the market is telling them with regards to their home. Sometimes “the market” tells homeowners that their home is overpriced.. or that you can hear the train tracks or a busy street from the living room, or that the smell of cat urine is overpowering… I’ve heard them all! It never ceases to amaze me how homeowners can look at a problem square in the face and not see it for what it is, even when others are pointing it out. Homeowners almost always minimize it by saying things like “well, I can’t hear/smell/see it” or “you get used to it after awhile.”
While those excuses and thought patterns might have worked in an artificially low interest, easy money day; those days are long gone.
Now, one must make the difficult decisions head on that are required to sell your home. If you aren’t prepared to make those decisions with regard to price, terms, or condition, you are going to have a difficult time.
Epitaph
For Benjamin Franklin, the epitaph he wrote reads thus; “The Body of B. Franklin, Printer; like the Cover of an old Book, Its Contents torn out, And stript of its Lettering and Gilding, Lies here, Food for Worms.”
There are dark days ahead for real estate. Don’t kid yourself. You are smart enough to have done the research yourself, and you are aware that we are on the precipice of economic conditions that Americans have not known in generations. However, dark days are the things that bring about greatness within us, and our Nation. I do not believe that our best days are “behind us.”
I do believe that we must be prepared to face whatever economic storms we will face us ahead. While I am not “good” at many things, I am “good” at knowing what to do in a real estate recession such as this. I’ve been blessed with experience in these areas, and I’ve come to know that it is those who act decisively, and quickly that avoid danger.