Change is on the horizon. For what felt like a moment in time, buyers enjoyed the luxury of being incredibly picky, carefully selecting what felt like their dream homes in a market that had shifted towards more favorable conditions. While I hate to be the bearer of bad news, that era is almost most definitely drawing to a close.
With the coming together of interest rate drops, the persistent, continued low inventory levels and 2023 being recorded as the slowest year for U.S. home sales in nearly 30 years as high mortgage rates frustrate buyers, the market is reshaping real estate once again, placing buyers on the back foot and swinging the pendulum back to favoring sellers.
The changing tides
Previously, buyers were able to look for over a month, as average days on market continued to climb. There was a more laid-back approach to the market with interest rates so high. Well into January, we are already seeing properties go under contract in the first weekend with multiple offers. While it is not to the level of our markets with 2% and 3% interest rates, it is a huge turnaround for those who were looking while the interest rates were hovering on or near 8%.
The era of buyers collectively being an exceptionally picky bunch therefore is approaching its end. Interest rates, a key determinant of the real estate market’s health, are on a downward trend. This decline, coupled with the aforementioned low inventory levels, is set to rekindle suppressed buyer demand. Real estate agents need to brace themselves for a shift as we witness a market more reminiscent of previous pandemic years.
As we get into 2024, if interest rates touch the 5% mark, we can assume a market that heavily favors sellers. Buyers who grew accustomed to taking their time and being discerning will find themselves in a more challenging environment. This shift is indicative of a return to a more balanced market, with sellers holding sway over the limited available inventory.
Will we get more inventory?
The strategy has changed for buyers. Where previously we could look for a home on a scale of 1-10 that was a 8-9, now we are looking at 6-7. The perfect home doesn’t really exist and finding a forever home in a market similar to this one is extremely difficult unless a buyer is willing to pay.
It’s a delicate balance between interest rates and equity. If rates drop and equity levels rise, homeowners may be more inclined to release their properties into the market, capitalizing on the accrued equity to offset higher interest rates. This equilibrium requires strategic planning and effective communication with potential sellers.
The second avenue for expanding inventory is new construction. Unfortunately, we all know the demand for housing has far outpaced the ability to build at a comparable rate. The real estate industry must keep up with the big appetite for housing.
While building can contribute to increased inventory, it alone cannot bridge the gap between demand and supply. Real estate agents should keep an eye on new developments and leverage these opportunities to meet the evolving needs of their clients.
The way to shift strategy is to move from looking for properties that are perfect for a buyer to looking for a great equity buy that makes sense for the buyer for the next 3-5 years, rewarding them at the time of sale with a large chunk of equity that they would have lost while renting.
Real estate professionals need to prepare for a year of appreciation, with property values likely to see an uptick. As buyers face a more competitive market, this shift once again requires real estate agents to adjust their strategies and comes with a hefty dose of managing client expectations. Educating buyers about the changing market conditions and helping them adapt to one that favors sellers will be a big portion of the work for agents.
The days of buyers being overly picky are ending, my friends, giving way to a seller-centric market driven by dropping interest rates and constrained inventory. Real estate agents must embrace this shift, proactively addressing the challenges and capitalizing on the opportunities it presents. That’s the name of the game in real estate.
Bret Weinstein is the CEO and founder of Guide Real Estate in Denver, Colorado.