The situation in many markets across the country has begun to change: Home sales are slowing down and so too is the momentous price growth seen just a few months or years ago.
It’s been more than 10 years since the onset of the Great Recession. Thankfully, the days of high foreclosure rates and neighborhoods littered with vacant homes are past. In fact, in recent years, the housing market has been characterized by the opposite: soaring prices and an historic inventory shortage, leading to one of the best markets for home sellers on record.
But the climate has begun to shift: home sales are slowing down and, so too, the momentous price growth from a few months ago. While no credible reports suggest anything close to the days of 2008, the changing trend lines raise two important questions: Are we entering a buyer’s market? And how should agents and their brokers adjust to serve their clients?
Inman spoke to dozens of real estate professionals and economists to drill down on how the market is turning and what it means for your business. The guide below is a result of research and reporting by Inman’s staff and can serve as your lantern through the fog.
Data on the changing market
How are home prices and affordability changing?
Post-recession, housing prices have been on a steady and steep upward trajectory, climbing above even pre-recession levels. That’s finally starting to level off, but it remains to be seen just how affordable the housing market will be (or not) in the near-to-medium term.
A number of economists that spoke with Inman noted that price growth is going to decelerate over the next year – and the market may even see small price declines in some regions. Case Shiller’s most recent home price index found that year-over-year growth in home prices in August was at the lowest level it had been all year.
“The broader economic environment is still supportive for house prices with firm demand because of a strong labor market and still limited supply, although this is now improving,” Tendayi Kapfidze, chief economist of the online loan marketplace LendingTree told Inman. “There are likely to be localized declines in home prices in areas where affordability is weakest and valuations have gotten the most stretched.”
A characteristic of the current market is that more homes are seeing price reductions as they hit the market, according to Matthew Gardner, the chief economist at Windermere Real Estate. Many home sellers have come to market with unrealistic expectations, which has led to a 15 percent increase in price reductions nationally, he said.
“These price reductions are putting downward pressure on home prices at the moment but, as sellers’ expectations become more realistic, home prices should begin rising again, but at significantly slower rates as we move steadily back toward a more balanced market,” Gardner added.
Inventory: is supply going up or down?
One of the reasons that prices have been so high in recent years, according to economists, is because demand has far outweighed supply in the market, but things are finally starting to turn around. According to the National Association of Realtors, the 4.2 months supply of inventory in September was the highest level in a year.
“Certainly in recent months, things have shifted a little bit towards the direction that we’re seeing a modest uptick in some inventory, but this is from very very low levels,” Leonard Kiefer, the deputy chief economist at Freddie Mac said. “If you look at the absolute level of inventory across the country, for-sale inventory is still extremely low.”
Ruben Gonzalez, the chief economist at Keller Williams also said we have a way to go until we reach inventory levels high enough to support price reductions.
“Typically, when we’ve seen price declines, in the last three decades or so, usually we see inventory levels well above six months, usually in the eight-to-nine-month range,” Gonzalez said. “We’ve got quite a ways to go in terms of inventory shifting before we start to see declines in home prices.”
With inventory rising year-over-year in October, what realtor.com called the “longest inventory slump in history,” was finally over. The “in history” claim is certainly both startling and lofty, and the home search portal run by News Corp.’s subsidiary Move Inc. has data only going back four years. But a spokesperson told Inman that the claims are supported by the 20-year-plus dataset from the National Association of Realtors.
“Buyers have been struggling for four years to find homes in their price range while dealing with bidding wars and multiple offer situations,” Danielle Hale, chief economist for realtor.com said. “The inventory increase will not solve the problem overnight, but it should provide some relief to those still in the market, especially if the growth we’re seeing in more affordable homes and condos holds steady.”
Is the turning market is hurting major franchises?
Realogy missed its earnings guidance and fell two percentage points below the low-end of its third-quarter expectations in terms of transaction volume due to a slowdown in home sales. It also projected flat transactions for the fourth quarter, but it could mean we’re heading towards a more balanced market.
“The slowdown in September transactions, combined with the increase in inventory may be the start of a transition to a more balanced environment that would be positive for the housing market,” Ryan Schneider, the CEO and president of Realogy said.
RE/MAX re-adjusted both its fourth quarter and yearly guidance on agent growth and revenue, due to the slowdown.
“We are witnessing a larger-than-expected slowdown in home sales this fall, as homebuyers and sellers adapt to a shifting market,” Adam Contos, RE/MAX’s CEO said. “We believe market participants are adjusting to the changing market conditions – price appreciation, low inventory, and rising interest rates – and therefore this recalibration likely represents a temporary transition rather than a lasting trend.
Is it a buyer’s or seller’s market?
It’s been a seller’s market since the housing crash and conventional wisdom suggests the housing market will mostly continue to favor sellers, at least for another year or two, but the scales won’t be tilted as favorably towards the seller, according to economists.
“Home sellers have held most of the negotiating power for the past several years,” Zillow Senior Economist Aaron Terrazas said. “Signs of that easing up are starting to show, but home values are still growing well above their historic pace and the effects of years of limited construction still linger.”
The team of economists at the Seattle-based real estate tech giant has said the industry won’t see a buyer’s market until at least 2020 and continue to stick to that expectation.
“I think we’re entering an ‘opportunity market,’ which is a way of saying that it’s a market where we are able to match buyers and sellers because it’s become a negotiable market,” Durkin told Inman. “Having the right agent right now really gets you in front of the sellers and the property you want without realizing it.”
Mortgage interest rates: how high will they climb?
Mortgage interest rates are climbing (the current rate for a 30-year-fixed interest mortgage is 5 percent, according to Wells Fargo), thanks in large part to the Federal Reserve, which has raised interest rates three times this year.
That’s putting an even bigger crunch on affordability. As the year comes to a close, the rise in interest rates is starting to slow a bit.
“We’ve had a pretty big run-up in mortgage interest rates [this year] but they’ve leveled off a little bit over the last couple of weeks,” Kiefer said. “But we’re still up around a full percentage point from a year ago and in my view, that’s had a lot of impact on a lot of the dynamics we’ve seen in the housing market in 2018.”
A slowdown in the stock market could also further impact interest rates, according to Gardner.
“In ‘normal’ circumstances, a drop in equities drives people to bonds and that does reduce yields,” said Gardner. “This time, however, we are seeing yields rise which does raise mortgage rates. It’s a very unusual situation.”
The rise in interest rates – coupled with high prices – is taking some buyers out of the market.
Maureen Green, a Realtor with Kinlin Grover Real Estate, told Inman she had one buyer, a young teacher in Cape Cod she’s been working with for the past eight months, struggle to find an affordable home. The buyer keeps losing the few available modest homes in her budget to other buyers.
“Even with special programs for first-time buyers like her, she is losing hope she’ll ever be able to afford her own home,” Green said. “For her, the ‘booming economy’ is leaving her behind.”
Kapfidze said we will probably see further increases in mortgage rates in 2018, but perhaps to a lesser extent than the past two years as there’s no obvious catalyst on the horizon for an acceleration in rates. He could see a rise of maybe 50 basis points.
“In late 2016 and early 2017 it was the election of Trump that boosted rates, which then fell throughout 2017 to end the year lower as there was no policy supportive of mortgage rates,” Kapfidze said. “In 2018 it was the realization of those expectations for expansionary policy with the tax cut and stimulus bills that boosted mortgage rates.”
“If we get a Democratic house, expect gridlock and economic growth to moderate, hence slower increases in rates,” he added. “Faster wage growth is a potential catalysts, but wages have persistently disappointed in this economic recovery.”
He also doesn’t believe interest rates will ever return to astronomical levels.
“Demographic trends argue for lower rates for longer,” Kapfidze said. “Think Japan. Rates are anchored by nominal growth rates, which are anchored by labor force growth which is anchored by population growth. Absent an inflation shock, I would not think rates would get astronomical.”
How should agents adjust?
Real estate agents should be prepared for a turning market. Many believe it won’t significantly impact the way they do business, but other’s are already starting to develop strategies and best practices on how to adapt.
Where to find buyers
Finding buyers when the market turns will be key and Kristin McFeely, a Philadelphia-based real estate agent with Compass, believes it will be more important than ever to be involved in the local community, especially when it comes to open houses.
“I think going back to more grass-roots marketing to find buyers will be key,” McFeely said. “Get involved in your community by volunteering, attending school functions and even sitting on your zoning board to authentically meet people.”
Both McFeely and Dan Smith, a former Realtor, real estate coach, author, speaker and Inman contributor, believe that positioning yourself as an expert is going to be a key to success in a turning market.
“Provide neighborhood and community information, and position yourself as the expert — not just a host,” McFeely said.
“Knowledge of the market will be huge,” Smith added. “If an agent ever says the words ‘let me check the MLS,’ then their knowledge will be lacking in the eyes of the buyer.”
Marketing and pricing homes in a changing market
Scott Curcio, a real estate agent with Baird & Warner, believes sellers need to see the property from the buyer’s perspective. He said he’s paying attention to homes that are contingent or pending to really understand where buyers are seeing the value.
“Proper pricing and staging is as important as it ever was,” Curcio said. “It’s more important to look at your active competition for sale, to see how you fit. Price yourself in relation where you will stand out as the most compelling property for sale – the one that someone would buy next.”
Brandon Doyle, a real estate agent with RE/MAX Results in Minnesota, said real estate agents need to be careful with pricing as the market turns.
“For sellers still on the market or planning to list, we’re very cognizant of pricing,” Doyle said. “This is not the time to push the price. Some sellers are choosing to reduce the price in order to attract motivated buyers before they offer on a competitive listing.”
Helping sellers get off the fence
Every agent has that client that’s anxiously monitoring the market and trying to predict when they’ll get peak value for their home.
“Honestly, no one ever knows when the peak occurs, nor do they know when the nadir occurs,” Frederick Warburg Peters, the CEO of Warburg Realty, wrote for Inman. “As either a buyer or a seller, you just have to hope to be more or less on the right side of history.”
Agents shared with Inman six tips to help hesitant homeowners get off the fence and make a deal:
- Share the facts. Real estate agents should always be armed with the latest knowledge and statistics like: home value growth, interest rate fluctuations, historical data, and market predictions.
- Learn your client’s needs. A client’s needs always depend on their current situation, like a new job or a growing family.
- Provide a realistic outlook on a client’s selling prospects. Put together a comparative market analysis to show listings that sold or expired to prevent the homeowner from overestimating.
- Recognize and address fears. This is the likely the biggest transaction of your client’s life, so sometimes that hesitancy could just be fear.
- Explain that trying to predict the market is (mostly) a losing game. Even with the abundance of experts and knowledge on trends, it’s really impossible to exactly predict the future.
- Do not push homeowners. You should always be encouraging, not insistent.
Use your follow up skills
Chavi Hohm, the team leader of Team Diva at Coldwell Banker Bain, said prices have actually already started to drop in Seattle, and next spring, the market will be flooded with new inventory in the condo and luxury market. Hohm offered some advice for agents on the changing market.
“Many of the buyer’s agents are new to real estate and lack the follow-up skillset to encourage buyers back into the market to scoop up the deals,” Hohm said. “Those with good follow-up skills will win in this market.”
Tools and resources
If times get tough for real estate brokerages due to a slowdown in sales, the virtual brokerages will be able to provide a unique flexibility because they can operate leaner than brick-and-mortar shops.
“We built the model to be sustainable in both down markets and up markets,” Sanford said. “We started in 2009 and, generally speaking, we’ve been cash flow since that point in time. We think the virtual world, in our look at it, it allows us to shrink as needed and expand much quicker.”
Russ Cofano, president and co-founder of the app-based brokerage Real, previously told Inman that he’s bullish on brokerage models that leverage technology versus brick-and-mortar brokerages. Being virtual will enable brokerage firms to more easily scale up and down.
Even Keller Williams announced recently it would be launching virtual brokerages for its expansion business owners.
Artificial intelligence is already a mainstay in the real estate industry – with thousands of agents and homeowners deploying different AI tools to enhance the transaction from start to finish. Inman rounded up some of the best AI tools for agents to use, recommend to their clients, or in some cases, identify and prepare to engage as potential competition.
- OJO: Launched in 2017, a chatbot that communicates with home buyers via text message to gather information about what the buyer is looking for in a home and answer questions about listings.
- Kelle: Keller Williams’ artificial intelligence-based virtual assistant Kelle can fetch contact information, create calendar events, and was recently updated with the capability to pull “Snaps,” cards that feature sales numbers for a local market and an agent or their team. The company is also training the tool to predict the outcome of a transaction.
- IMRE: A chatbot that can converse with prospective buyers via text message, who land on an agent’s website or Facebook page. The product provides agents with a chatbot that interacts with prospective buyers.
- Structurely: The company behind Aisa Holmes, a chatbot that nurtures and qualifies leads. It’s meant to be a virtual assistant for agents.
- Zillow: Zillow has deployed AI across multiple departments, including its Zestimate home valuation feature. It’s training the software to take more data into account to better estimate the value of the property and says it has made Zestimates 15 percent more accurate in the small test market.
- Restb.ai: The product scans listing photos, then figures out what’s actually in them – what room it’s in, the difference between interior and exterior shots. It can analyze hundreds of images a second, differentiate between 16 different architectural styles, and classify images according to more than 30 different scenes.
- Revaluate: The company uses AI to turn data into leads for agents. It can cross-reference a database of contexts with internet search, spending, social and government data to build a profile around those contacts and help agents identify significant life changes.
- Cherre: Cherre connects data sets related to property for large clients such as banks and insurance companies. It boasts that it can help clients come up with more accurate property prices, make smarter investments and better understand risk.
- Reali: The flat-fee brokerage uses artificial intelligence technology to predict the sale price of homes. The idea is to give prospective buyers better odds of placing winning bids.
When the seller’s market is booming, so are pocket listings and ‘coming soon listings,’ the practice of keeping listing off the multiple listing service (MLS) or letting a client see it before it hits the MLS.
Realtors told Inman that the practice will still be commonplace within the luxury sales market for a number of reasons, including wealthy clientele not wanting their home sale to be public. But in other markets the practice could wane.
“It obviously doesn’t work as well when there’s less demand and less inventory,” Gary Gold, a Los Angeles-based Realtor with Hilton & Hyland, told Inman, “In a buyers market, does a pocket listing make as much sense? No, it doesn’t.”
Jane Strauch, a Realtor with the Grubb Company in the San Francisco Bay Area, echoed those sentiments, saying pocket listings are, “going to be fewer and farther between.”
Others disagree, however, and note that pocket-listings or coming-soon listings are a marketing tactic and an additional way to drum up interest, always useful in a buyer’s market.
In conclusion: Stay focused and stay local
Most of the sources who spoke with Inman emphasized the need for Realtors and brokers to focus on providing clients with the best and most knowledgeable service, above all.
While different tools and data can be deployed to enhance that process, there’s no substitute for the relationships professionals forge with their clients, nor for the acute and up-to-date knowledge top agents must cultivate to stay ahead.
As long as professionals focus on those areas, they’ll succeed as the market continues to shift.
With reporting by Inman staff.