What's a "Normal" Housing Market?

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Real Estate

With so much talk about the real estate market these days, it's important to keep it all in perspective.  For one, there is no singular "Real Estate Market".  There are many real estate markets of varying sizes and locations.  All real estate is local.  It's true.

There have been hot-takes-galore regarding "the real estate market" coming out of what I will generally call the Covid Era, which kicked off in March of 2020 and lasted until the second quarter of 2022.  The Covid Era can be summed up by 3 anomalies:

  1. A contraction of available housing stock that we've probably never seen before.
  2. The lowest mortgage interest rates in history.
  3. The highest number of CASH offers we've seen in decades.

Let's look at each one...

  • Low Inventory heading into Covid which was further exacerbated by Covid:  When Covid-19 hit in early 2020, the real estate industry, like so many other industries, had no idea what the effects would be on sales, ability to even do our jobs, and ultimately, income.  Would people still buy homes?  Would people still sell homes?  What quickly became apparent was that people were more than willing to buy homes once the lockdowns began, yet, far fewer people were willing to sell their homes during the pandemic.  We entered into 2020 already at a housing inventory deficit.  There were already some multiple offer situations taking place...and there had been for several years leading up to 2020.  The difference is, when people resolve to buy homes, they typically don't primarily base that decision on whether or not the market conditions are favorable.  When people move, they have deep-seated reasons for doing so.  But sellers in a pandemic, wary of the unknowns regarding a new virus, were much less interested in having strangers walk through their homes, and they certainly weren't going to move just for fun--or even record profits.  The result was an ever-decreasing amount of housing supply which reached its low point in early 2022.  To put this inventory issue into perspective locally, there were nearly 4,000 housing units (single family homes and condominiums) for sale in the Greater Louisville Association of Realtors Multiple Listings Service in late 2019.  By Early 2021, inventory had dropped below 1,000 available units.  This unprecedented lack in housing supply made for a blood bath anytime a new listing hit the market.
  • Sub-3% Mortgage Interest Rates:  For over 20 years, mortgage interest rates have been at or near historic lows.  Ask anyone who owned a home in the 1980s what their interest rate was, and any dissatisfaction with today's more historically-aligned rates will quickly evaporate.  But what we had was almost free money.  There is an important distinction, however, between the "free money" of the late 20-teens and the "free money" of 2001-2006:  The more recent "free money" phenomenon had nothing to do with low/no mortgage loan standards.  We are only talking about absurdly low rates.  The lending environment of the earliest years of the 21st century was one of deregulation mixed with a grandiose vision to make home ownership attainable for more people than ever.  In short, this was not like that, and yet, common sense will tell you that if the cost of money is extremely low, affordability for more people will be extremely high...except for one thing:  Because of the lack of housing choices (see above), the number of offers on nearly every listing that would hit the market was exponentially higher than normal, and the number of cash offers pushed many potential traditional homebuyers out of the home-buying game.  So rates played a part, but prices were driven in many cases by cash buyers (regularly more than one per property).  Due to scarcity, almost every house seemingly would be bid above its asking price, and some absurdly so.  Louisville, KY is typically a fairly stable housing market, not usually as volatile as coastal areas and normally features a steady, moderate appreciation rate.  The Covid Era brought housing gains like we have never seen.  For instance, a typical appreciation rate for a neighborhood like St. Matthews would be around 5-6% per year.  From 2019 to the end of 2022, that figure was approaching 14-15% per year at its peak.
  • More cash injected into the housing market than we've ever seen?  I'm not prepared to say that necessarily, but the combination of fewer goods (hyper-low inventory) and a historically strong buyer pool sure made it seem like that when you were a Conventional homebuyer with 20% down, nothing to sell, and great credit, and yet, you kept making offers way over asking only to find out that the property received 3 cash offers that were nearly as high as your offer.  I said multiple times to buyer clients of mine during hottest parts of the Covid Era that one/two/three years earlier, a homebuyer with the strengths of the one I just described would have been welcome with open arms at the home-seller's feast, but cash is very difficult to turn down as a seller.  Therefore, that incredible buyer pool who never won a bidding war in lots of cases took themselves out of the game.  

So...the big question is, of course, where do we go from here?  Is the housing market starting to "normalize"?  The answer to the second question thus far seems to be, "maybe".  I would say that if you made an effort to buy during the pandemic and lost to cash buyer after cash buyer and then decided to step out of the fray, you might think about re-entering now as spring approaches.  Obviously, interest rates have increased a lot compared to just over a year ago, but historically, they are still very good, and you can always refinance when--and I do think it's when--rates come down.  I have no confidence that they will get back to the ultra-low levels they were in 2021, but a modest retreat back into the 5s, possibly upper-4s, doesn't seem too farfetched.  But the big advantage of this new normal is that buyers actually have the ability to negotiate interest rate buy-downs, seller concessions for closing costs, and even repairs based on inspections.  Also, instead of 30 competitors for a single home, you might not have any.  Even in the cases where there are multiple offers, they are trending much closer to asking price level bidding than the tens of thousands over asking we were seeing in 2021.  Lastly, there's even been a slight uptick in inventory.  Now, it's still lower than where we need to be, but it's improved quite a bit over the low points of the past 3 years.  

All of this also means it's still quite a time to sell.  Nearly all potential home-sellers are sitting on more equity than they've ever had.  So while the insanity might be over, it's the first time in my nearly 20 years of selling real estate that I can say with integrity that it's an attractive real estate market for both sellers and buyers.  And since all real estate is local, reach out to me if I can be of assistance to you as you contemplate a move in or around the Louisville Area.  I'd be honored to get more specific with you based on your needs and map out a plan whether you're selling, buying, or investing in Louisville area real estate.