Faced with rapidly declining prices, are sellers agreeing to an attractive asking price in listings?

  • No, few sellers initially agree (55%, 11 Votes)
  • Around half of sellers initially agree (30%, 6 Votes)
  • Yes, most sellers initially agree (15%, 3 Votes)

Total Voters: 20

Today’s willing homebuyers remain undeterred by rising interest rates, over-priced homes and slowing sales.

Even with clear signs that the housing market is rotten at its core, they’re willing to spend even more to get a piece of the pie. This trend began during the pandemic year of 2021, the difference today being high, not low interest rates.

As evidence: mortgage payments for newly originated loans hit a new high in May 2023, according to an index published by the Mortgage Bankers Association (MBA). The MBA’s Purchase Applications Payment Index measures how payments on newly originated mortgages change compared to income.

The mortgage-payment-to-income ratio increased 2.5% in the single month of May 2023 alone. Further, compared to a year earlier, this ratio is up 7.6%. A misallocation of personal wealth is taking place to fulfill the government policy of homeownership.

Nationally, this averages out to an increase of $268 per monthly mortgage payment from one year ago. Here in California where mortgage amounts — and home prices — are significantly higher, the increase is much larger.

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Buyers in the driver’s seat, but their GPS is broken

Since early 2022 when mortgage payments jumped a massive 40% in the span of a few months, the MBA’s index has yo-yo-ed with buyers’ fickle attitudes toward the housing market.

But numbers don’t lie: as of Q2 2023, buyer purchasing power is down 11% from a year earlier due to interest rate increases alone. This means a buyer with the same income as a year ago is limited to borrowing 11% less due to higher mortgage interest rates. Yet, the amount buyers are willing to spend monthly continues to increase. Of course, mortgage lenders with fewer originations are fast to stretch ratios to lend ever more money in recessionary times, as in 2006 and today.

Axiomatically, any rise in mortgage rates instantly cuts the amount of capital funding homebuyers can normally borrow, and in turn the price they are able to pay for a home is reduced. This dynamic was first expressed in mid-2022 buyer behavior when home prices began to plummet from record heights: buyers were catching on to market dynamics and refusing to pay sellers’ high asking prices. Sellers gradually loosened their grips and the sticky price phenomenon subsided.

But home prices in the spring annual buying season of 2023 reversed course. Is this simply part of the bell-shaped sales bump in Q2 every year — except the pandemic onset year of 2020?

In other words, is today’s price bump a mere seasonal hiccup in the broader declining trend, or are homebuyers ready to drive up prices again despite reduced borrowing power?

For an answer, future pricing is reliant on:

  • today’s sales volume (down 22% from a year earlier as of May 2023);
  • trends in mortgage interest rates (still rising as of July 2023); and
  • buyer willingness to spend, which is now about the economy — as allowed by jobs.

With the Federal Reserve recently letting up on its inflation fight, some buyers are working on the belief that it’s once again safe to spend — they became less concerned about the future (and savings) overnight. This Fed boost of economic confidence, along with the ever so meager seasonal bump in sales volume, has helped push buyers over the edge to enhance a cyclical singular rebound in pricing for Spring 2023.

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But like most cyclical rebounds, don’t expect it to last.

Absent Q2 seasonal movement, watch for sales volume and prices to lose all steam in the second half of 2023. firsttuesday forecasts home prices will slump below 2019 pre-recession levels by end of 2024, not expected to find a bottom until around 2026. This result plays out whether we have a “soft landing” or a “crash” in jobs and wages at the end of the Fed inflation fight.

Buyers who purchased in 2023 on the false belief that prices had already bottomed will find a short-term companion in regret. Low down payment buyers will quickly see their home plunged underwater. Worse, they will be stuck in place as jobs in economic turndowns require relocation — unable to move without pursuing the ugly benefits of a strategic default and foreclosure.

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