High demand and tight inventory are the two primary factors holding the real estate market back. The good news is that the inventory shortage may have peaked, and due to rising interest rates, will probably improve in 2018.
- Rising interest rates will likely help relieve the inventory shortage. To take advantage of this opportunity, connect with your past clients who may want to move up, check in with baby boomers and prospect single-family renters.
The high demand and the tight inventory are the two primary factors holding the real estate market back. The good news is that the inventory shortage may have peaked, and due to rising interest rates, it will probably improve in 2018.
I recently interviewed Leslie Appleton-Young, the vice president and chief economist for the California Association of Realtors, and Steve Cook, the founder and publisher of Real Estate Economy Watch. Both are optimistic that the worst of the inventory drought is behind us.
Reasons the inventory will improve in 2018
In December 2017, median list price year-over-year was up 8 percent, days on market was down about 7 percent (to 83 days) and inventory was down 9 percent.
Nevertheless, Javier Vivas, Director of Economic Research at realtor.com, sees signs of a cool down:
“The housing landscape in 2017 ended in suspense, and our inventory data in December corroborates that with mixed signals. While active listings remain in very short supply, we continue to see clues of a decelerating trend in both the pace of sales and home buying interest, hinting that sections of the market are already lining up a cool down. The last week of the year in particular showed signs of deceleration, and saw the smallest yearly declines in total inventory. The market continues to tighten but at a slower pace and it also remains highly susceptible to wider changes in the economic landscape. This shift also comes at a time when key tax plan changes, rising interest rates and slowing rents are conditioning homebuying prospects and further fracturing the market, setting up an interesting year for housing in 2018.”
More bad news for first-timers
At the peak of the downturn, 50 percent of the purchases were first-time buyers (an average market is about 40 percent to 45 percent). NAR reported that for November 2017, the percentage of first-time buyers has dropped to 29 percent, down from 32 percent in October and 34 percent earlier in 2017.
Plenty of inventory in the higher price ranges
Appleton-Young said inventory in the upper end of the market, which is relatively immune to any changes in the tax laws, plateaued about two years ago.
There is ample inventory, and that market should remain flat in 2018.
Some relief in the mid-tier markets?
The mid-tier price ranges should see the most notable inventory improvements.
The strong economy is driving the Fed to increase short-term rates, which will ultimately result in mortgage rate increases. This in turn will create a flurry of listing and buying activity as everyone tries to transact before the next rate increase occurs.
What all this means for your real estate business in 2018
Here are five ways these changes can impact your business in 2018.
1. Change how you write up loan contingencies
If you have never experienced a market where rates are rising, there’s no shortage of lender shenanigans to extract higher rates from buyers. Here’s a typical scenario:
The rates tick up, there’s more volume, the lender doesn’t have enough staff to handle the increased volume, and of course, the real issue is the lender is unable to sell the lower rate loan on the secondary market.
At this point, the backup causes the lender’s loan commitment period to expire, and it no longer has to provide the lower rate loan. When you ask for an extension due to the delay, here’s what you will probably hear: “We can fund it a half point higher or we can give your client an adjustable rate mortgage (ARM).”
Although the buyers and their agents may not like this, if you’re representing the seller and want to keep your deal together, counter the interest rate half point with the current prevailing rate.
Also, start countering 30-year fixed rate loan contingencies with “The buyers agree to take an ARM with an interest rate not to exceed X percent if they cannot qualify for a fixed rate mortgage.”
Please note: countering with “best prevailing rate” violates contract law by leaving the rate open ended — the rate must be capped with a specific number.
2. Capitalize on the market surge
As noted above, we haven’t seen serious mortgage rate increases for over a decade.
Owners generally prefer to move up when rates are lower. This is a good time to contact your past clients who may be in the market for a move-up home.
They can get the maximum amount for their home now, plus the home they’re buying will be less costly due to the lower rates.
3. Help boomers make their move
Cook argues that for the 65-and-up crowd, this is a great time to sell.
According to the U.S. Census Bureau 79.5 percent of those age 65 and older own their own home as of the end of 2016.
Look through your past client list, and identify any older owners who have a big family home and who may be ready to downsize or to relocate elsewhere.
If you are actively prospecting, use REI Source (available through your favorite title company) or Facebook targeted ads to identify these individuals as well.
4. Prospect single-family rentals — a stepping stone to homeownership
Cook said single-family rentals are exploding as a way for millennials, who may not be able to afford a down payment, to live in areas with good schools and strong communities.
To take advantage of this trend, prospect people who have been renting a single-family residence for at least two years. They may be ready to step up and purchase.
Moreover, because the bulk of rentals are owned by mom-and-pop investors, these owners may be more open to selling or trading into a more expensive property now that the economy is so strong and the 1031 exchange provisions are unchanged.
5. Notice redistribution and migration of jobs to areas that are more affordable
Appleton-Young said the big housing story for 2018 will be how the tax bill impacts migration from high cost states like California, Illinois, New Jersey and New York to states where housing is more affordable.
Let’s hope that the worst of the inventory drought is behind us and that 2018 will be the year where a more balanced market starts to emerge.
Bernice Ross, President and CEO of BrokerageUP (brokerageup.com) and RealEstateCoach.com, is a national speaker, author and trainer with over 1,000 published articles. Learn about her broker/manager training programs designed for women, by women, at BrokerageUp.com and her new agent sales training at RealEstateCoach.com/newagent.