Summary: Swings in the amount of available homes, interest rates, economic conditions, and demographic trends all affect the housing market. The direction of these shifts determines whether a seller’s or buyer’s market prevails.
A common term used among economists is “animal spirits.” This refers to the practical and emotional factors that influence buying and selling. While this idea did not originally apply to real estate, a strong argument exists that the housing market in the state of Washington is subject to animal spirits which can move the advantage to sellers or buyers at any given time. The key for both groups is to identify a favorable market when it occurs — and to move on it promptly. Are there telltale signs indicating which direction the market pendulum swings? Actually, there are, and they can benefit either side when timing a new transaction.
Real Estate Markets in History
Economists of both past and present posit the theory that real estate cycles last about 18 years, with values rising over approximately 15 0f them, then plummeting over the subsequent three years. Indeed, peaks in home values immediately preceded crests in the business cycle, a pattern followed from 1818 to 2006. These also corresponded with pinnacles in the construction cycle because home building increases with the rise in property values. The problem occurs when building continues and housing inventories climb. Once construction surpasses demand, real estate values begin to sink, according to historical studies of these cycles.
Seller’s Market Drivers
As history demonstrates, values drop in response to over-building relative to need. That decline, in turn, inhibits further construction for any number of years. During this time, inventory — i.e. the total number of houses available for purchase — slowly diminishes. When available properties remain stagnant, other variables (as listed below) bring new buyers to the market. When new construction lags behind this trend, the pool of buyers expands, sometimes incrementally and sometimes in surges. This is when sellers have the best opportunity to name their price because options narrow and urgency escalates for needy purchasers.
Neediness, of course, comes in degrees. Some buyers can wait…and often do when interest rates on home loans are high. Recent years have seen low rates as a rule so borrower expectations have changed. The late 1970s and early 1980s saw rates sometimes exceed 18 percent and people still transferred property. In this age, however, many would find anything over six percent to be shockingly outrageous. The bottom line is that more successful mortgage
applicants equal more home buyers. This is good news for sellers, who can allow prospective buyers to compete for the property and wait for the highest bidder. Yet buyers’ interests are also advanced.
A seller’s market benefits when more people want houses. As with interest rates, decisions to buy have much to do with projected cash flow — is a purchase affordable. Higher rates can make it more expensive but other issues come to play as well. Is the potential buyer secure with employment and earning enough to afford house payments? Are taxes, e.g. income and property, too high, thus robbing a prospect of needed revenue? How goes the rate of savings to provide enough assets to earn mortgage loan approval? Many of these answers are conditioned on how robust the general economy is. Down times work against sellers. Low unemployment, steady wage growth and a climbing gross domestic product all point, on the other hand, to a seller’s market. The purchasers are confident enough to enter the fray, but not strong enough to name their price.
Older, retired couples whose children have moved away are most often expected to downsize to a condominium or an apartment. This is true of baby boomers, retiring at a rate of 10,000 per day. Meanwhile, young millennials and Gen-Zers start families, retreating from cities like Seattle to suburbs like Yarrow Point to settle down. They look for “starter homes,” usually the same types of dwellings sought by the empty nesters. These population dynamics lift demand significantly, applying great pressure to the current inventory. Again, this is a sign of a seller’s market. Like each of these factors, however, demographics can work against sellers too.
Buyer’s Market Indicators
In the midst of a building boom and housing inventory expansion, sellers are forced to contend for bidders, who now hold the cards. Realtors will see this as list prices sink below comparable sale prices on appraisals. Real estate ads are more frequent and prominent while actual closings drop in number. Even the naked eye can discern a buyer’s market — “For Sale” signs are staying up longer as sellers must reduce their asking price…often more than once. Those with the resources and will to purchase should not wait too long for further reductions. Rivals could be on their way. Still, if the past is any measure, market slumps are good for at least a couple of years barring unforeseen developments. Nevertheless, buyers do best to avoid complacency.
When rates drop, optimism grows. Prospective homeowners see a window of opportunity to jump through. Lower monthly remittances relieve the household budget of some degree of stress. Moreover, substantial rate reductions mean a better chance of building up a positive credit history for young borrowers. Notice that lower rates increase competition for houses — one for the sellers — yet encourage buyers to bid on homes due to the promise of favorable cash flow. Given this, interest rates are not necessarily a reliable sign of one market over the other.
Here is another driver that leads in either direction. Worth noting, at any rate, is that fear of recession or downturn often affects sellers more than buyers — the animal spirits are at work in such cases. Sellers who think they will take a bath on a sale if they wait for a recession are prone to be more agreeable in contract negotiations. Such emotional responses are not isolated. Therefore, gloomy rumors and scenarios in media reports from Spokane can have a chilling effect on seller’s markets since a negative outlook can spur sellers to get rid of their homes at discounted prices even when current conditions are robust.
Mentioned above are the baby boomers transitioning to smaller residences and the exodus of millenials from urban to outlying areas, Tacoma to Clyde Hill e.g. This scenario serves sellers of smaller homes well but those same boomers may have a more difficult time selling their present houses. Another offset is the trend of boomers living longer, working longer and staying in their larger homes longer. Here is a change that helps younger buyers because they compete with fewer people when negotiating and making counter-offers. As tenure in the same house is extended, there is less incentive for home builders to focus on single-family residences of three bedrooms or more. All the while, young buyers are served by more availability of modest dwellings.
Seek Professional Advice
Clearly, markets are affected by inventory size, interest rates, the general economy, and the spatial movement of generations and the upwardly mobile. Any or all of these can signify a seller’s or a buyer’s market. Consistently, though, the amount of accessible inventory — the number of houses up for sale — is the single best measure of what type of market exists at any given time. All that said, neither buyers nor sellers should be swayed from pursuing their objectives. Experienced mortgage consultants and other real estate professionals know how to navigate both good times and bad. A great deal may await even in adversity. Seek a highly informed opinion before deciding whether to buy or sell a property.
Sammamish Mortgage has the experience and, in fact, has been in business for over 27 years. We would love to help make our expertise available to you. Based in the Pacific Northwest, Sammamish offers high quality loan programs in Washington, Oregon, Idaho, and Colorado.
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