The Changing Real Estate Market: What You Need to Know

by Mark Sprague, Independence Title’s Director of Information Capital

The real estate market is changing. For the last 10+ years, lending rates have been artificially low. That, in turn, with government stimulus from 2020 till now, drove a historically never-seen market where every real estate channel was doing well. In a normal market, one or more channels lag behind the others. With historically low rates, strong appreciation, government stimulus, etc., throughout the country, but particularly in Texas, every channel saw record-breaking sales and appreciation. (The historical appreciation for the last 50 years is 3.5%.)

The Impact of Artificially Low Lending Rates

Our central banks’ (the Fed / US) policies to stimulate the economy caused this strong appreciation and spending.

How Government Stimulus Influenced the Market

The Federal Reserve, to improve the economy, lowered their rate (Federal funds rate) to near zero at a .25 of a point. The federal funds rates today stand above 5%-5.5% as the Fed tries to slow the economy down and fight inflation. Economists and analysts say that as interest rates climb, financial conditions return to normal. (Remember the federal funds rate is the rate the federal reserve member banks (12 of them) lend to banks, mortgage companies, equity, etc.; therefore, an additional 3 points is what traditional lenders will lend.)

Back-to-back financial crises in the last twenty years convinced Fed policymakers to lower interest rates as low as possible and keep them there for extended periods of time. Along the way, they disrupted America’s basic math of personal finance and business.

For example, the Fed’s unconventional policies helped sink the profits investors received from safe bets. Government bonds, Treasury securities, and savings accounts all return minimal yield when interest rates are low. At the same time, low interest rates increase the value of stocks, real estate, homes, and Wall Street firms that make money by taking on debt/risk.

The Consequences of Prolonged Low Interest Rates

As the Fed raises interest rates, safer bets could pay off. However, old bets could turn sour and less lucrative, particularly those financed with lower rates. In plain English: To some extent, you’re limiting nonproductive investments that would not necessarily generate revenue in this high interest rate environment. It’s very different in a low-interest rate environment where money is close to free, and essentially, any investment is really worth it because the cost of capital is close to zero.

Unfortunately, this action can feed inflation, which has happened nationally and globally, pushing the Fed to do the only thing it can to slow inflation: raise rates.

Understanding Market Equilibrium: Seller’s vs. Buyer’s Market

According to the central bank’s recent projections, fed fund rates will stay where they are for most of 2024 and will fall only slightly in 2025, ending 2024 at around 5%—more than twice as high as in late 2019. Activity in the bond markets suggests that rates could stay near that level for the better part of a decade. Wall Street has begun summarizing the situation with a simple phrase: “Higher for longer.”

In residential, when real estate listing inventory approaches the 6-month level, we generally consider this “equilibrium.”   The separation of a ‘sellers’ market’ (In a seller’s market, homes sell faster, and buyers must compete with each other to score a property. These market conditions often make buyers willing to spend more on a home than they would otherwise, meaning sellers can raise their asking prices.) and a ‘buyers’ market.’ (A buyer’s market occurs when purchasers hold the advantage over sellers in price negotiations.)

COVID-19 and Its Effects on the Economy and Real Estate

Why this discussion and definition?

Surprisingly, the economy changed during COVID-19 (national economic stimulus and the Fed keeping rates low artificially helped). Texas and its metros became top job magnets nationally, driving historic ‘seller’s markets’ regionally and locally.

Texas: A Job Magnet and Its Housing Market Impact

Strong job creation and a growing population and demand, noticeably eroded Texas housing inventory in 2017, 2018, and 2019, and most Texas metro markets became a robust ‘sellers’ market’ with below three months’ supply.   Then COVID hit, changing the economy, particularly in real estate. The critical feature of this economic cycle is from early 2020 through mid-2022, when Austin’s unit sales exceeded the number of new listings almost every month, and the available supply fell to 1 month or less for 21 months. It was a historical market.

All of this caused strong inflation nationally, forcing the Fed to raise interest rates to slow it down. Between March 2022 and January 2024, the Federal Reserve raised interest rates 11 times to combat inflation and slow the economy. Historically, in the last 50 years, every time the Fed has raised rates, we have seen a national recession. Not this time.

Rising values and interest rates, along with a general economic slowdown, slowed housing demand, and the available supply increased. The number of active resale listings in April and May of 2024 was the highest we’ve seen since 2010.

The Recession Myth: Why This Time Is Different

Austin’s housing market has been considered robust and typical for the last ten years, but it was anything but normal. You would remember the frantic activity if you lived in the Austin and Texas housing market during that period of extremely low supply and high demand. The previous eight years exhibited seasonal peaks and valleys, albeit with Days to Sell far below what we experienced in previous cycles. But for more than two years — March 2020 through July 2022 – the median Days to Sell was 11 days or fewer!

During that time, we saw final sales prices at or above the starting list price for more than half of all sold listings for twenty-four months, peaking in April 2021 (110%) and March-April 2022 (106%). With the market reset after that second peak, we now find the median close price-to-original list price ratio much lower—at or below 95% in 12 of the last 17 months. It is closer to normal but still above historical norms.

Why this discussion? The Austin market has slowed to more of a normal pace; most listings that sell are averaging 95% of the list price. In the other Texas metros, an average of 98% of the list. These are still strong seller’s markets; however, they are not the seller’s markets of the last ten years.

If your home has been on the market for more than 30 days, it is likely, based on historical norms, that it is overpriced. This is coming from a good place; we want you to have success selling your home if that’s what you really want to do.

Selling Your Home: Pricing Strategies for Success

In today’s market, most sales occur around the median / middle of the market in pricing. A house is a house from the buyer’s perspective. Price it appropriately and listen to your real estate agent. Pull data. Know that June is when we see the most listings appear on the market annually. Listen to feedback and know that we are no longer in the demand of the last 5+ years. Texas is still seeing strong job creation. We still see improved sales from last year (when rates were raised). The average annual appreciation in the last 50 years has been 3.5%. 2024 appreciation will be in the mid-to-high single digits. Watch inventory both in your neighborhood as well as the price point.

Buyer-Friendly Market Conditions: Why Now Is a Good Time to Buy

This post is to inform you that the market is changing. In the long term, we don’t have enough housing inventory for sale or rent over the next five years. Yes, there is more currently than in the last five years, but there is a projected shortfall in the long term. If you are a buyer, it’s an excellent time to buy, with the market more buyer-friendly than it has been in years, and values will continue to rise.

If you are a seller, to achieve a quicker sale, heed the advice of professionals regarding market trends and price your property accordingly.

If you have any questions or concerns, please get in touch with one of our marketing reps.