It’s been about 18 months since interest rates jumped significantly from what had been historic lows below 3% to over 7%. More recently, interest rates have been bouncing around 7%. Presently, they’re around 6.6%, but they continue to be somewhat volatile.

So, what’s happened in the real estate market over the last 18 months? It’s a little complicated, with multiple factors at play…

The number of new listings decreased – and has remained lower. Overall, in the mid-Atlantic region, similar to elsewhere in the country, the number of new listings since interest rates climbed 18 months over is down 20% to 25% from before interest rates went up. That’s a significant reduction in the supply of houses available to purchase.

The biggest reason is because nearly every homeowner who has a mortgage and bought and/or refinanced before 18 months ago, has a mortgage rate in the 2.5% to 3% range. So, any homeowner that doesn’t need to sell, either to move or to accommodate a life change, is sitting tight. They don’t want to trade their current low mortgage rate for one that’ll be more than double what they currently have.

Demand has remained strong, despite the rise in interest rates. It’s counter-intuitive – conventional wisdom would say higher interest rates would stymie home buying due to the higher cost of borrowing for home buyers. That’s still the case, but there are countervailing factors that have bolstered demand more than higher interest rates have reduced it:

  • Jump in equity values and wealth – Anyone with meaningful investments in the stocks is wealthier now. Stocks are, on average, up 60% to 80% from just four years ago. Buyers with greater wealth will be more willing, and more likely, to spend more for a house.
  • Generational transfer of wealth – We began seeing this in a bigger way in the last five years ago or so and it’s accelerating. Parents and grandparents are giving money, or bequeathing money, to their children and grandchildren who, in turn, can put this money toward buying a house. Overall, it’s estimated that across the next two decades an estimated $70-$90 trillion dollars is expected to be passed on. A sizable chunk of that will likely be put into the housing market by the recipients of that wealth.
  • Home buying by investors – Investors, both individuals and private equity firms, now are the buyers of a huge percentage of homes sold – 14% of mid-priced homes, 16% of higher priced homes and a staggering 26% of lower priced homes. The houses bought by investors are mostly turned into rental properties, although some are flipped after being renovated.

Overall, with demand exceeding supply, sale prices have continued to rise. Across the last 18 months, home values have, on average, continued to rise, albeit more slowly now. While the market appears to be cooling some (more on this in a moment), it’s still not unusual to still see, within a few days of listing, for those properties that are in very good condition and are priced reasonably. multiple offers and some escalation clauses.

However, many sellers are realizing there’s now a limit on what they should expect. For example, in Montgomery County, as of this writing, 47% of the properties currently under contract were under contract within one week. At the same time, 51% of the properties currently listed for sale and not yet under contract have been on the market for more than 30 days.

It’s quite a dichotomy. Properties in very good condition and priced reasonably are likely to attract multiple offers and are under contract quickly. Properties in not as good condition or are simply perceived to be unreasonably priced are sitting.

Informed pricing of a house is critical to successfully selling a home. If a house is overpriced and sits for more than a few weeks, then prospective buyers tend to steer clear because they presume there’s an issue with the house or that the seller isn’t reasonable. Priced too low and, yes, you’ll likely receive multiple offers and can get the house under contract quickly, but you could very well end up leaving money on the table. Psychologically, buyers will typically limit how far they’ll escalate beyond the listing price, consciously or sub-consciously figuring if the seller and their listing agent don’t think it’s worth that much, then they shouldn’t either.

The real estate market may soon be heading into greater uncertainty. Some considerations:

A possible pending recession? It appears the economy is slowly cooling a bit, which makes sense given how strong the economy has been for the last few years. From my perspective, I think talk of a possible pending recession, though, is premature, if not off base, based on the facts. There’s a big difference between returning to a sustainable level of growth versus diving into a recession.

If anything, it seems like the news media has become ever more sensationalist regarding the economy (and, about everything else, actually). For example, just a week ago, the news media was breathlessly reporting on how the stock market was “tumbling” and “plunging.” But, the actual drop they were reporting on was only a few percent. And, this is after a huge increase of over roughly 60% to 80% over the last four years. Context matters.

A possible interest rate cut? The Federal Reserve’s interest rate decisions (or lack thereof) have been puzzling. It seems they kept interest rates too low for too long which contributed to the economy becoming overheated. Then, they seemed to over- compensate by jacking interest rates way up. Now it seems they’ve kept interest rates too high for too long.

There’s talk now of the Federal Reserve finally lowering interest rates, at least a bit. If they do, it’ll help loosen up the housing market. Homeowners will be more likely to sell in order to buy another house (since there won’t be as big a difference between the interest rate they’re paying now on their current mortgage versus the new mortgage they’d get for the home they’d be buying) and lower rates will obviously help prospective home buyers.

Keep in mind, though, a return to interest rates below 3% shouldn’t be expected, so long as the economy remains at least reasonably healthy. Historically, over the long term, rates in the 4%-5% range have been more typical when the economy’s at a sustainable rate of growth.

Political uncertainty. So long as our democracy stays intact and peaceable, I don’t see politics having a significant impact on the housing market in the near- to medium-term. I’ll leave it at that.

Overall, given all of the above, and based on what I’m seeing in the real estate market, I am expecting the housing market to gradually soften a bit, but not as much or as fast as others are saying. And, I’m not expecting prices to drop much if at all, at least at this point, given current market dynamics. However, it does seem like we’re experiencing a leveling off of prices. Again, context matters – home prices have risen a total of 35% to 40% in the last five years. So, if there were to be a modest drop in home prices, anyone who has owned their home for more than a few years will still be well on the plus side.