Prepare for lower prices, fewer offers

The last few years have been very good for people who have decided to sell their homes. The massive relocation shake-up means most homes coming on the market have been subject to bidding wars. Wealthy baby boomers jumped in with all-cash deals, and sellers made huge profits as weary buyers pushed prices to new heights. There was no doubt who had the upper hand.

Today, the fortunes of sellers are changing. Real estate prices continue to rise, at a modest pace, across most of the country, but gone are the days of putting up a for sale sign and waiting for the feeding frenzy to begin. As buyers’ options slowly increase, sellers may have to reduce asking prices or wait longer for a viable offer. Today’s home buyers also aren’t very willing to skip inspections or waive other contingent rights to expedite a sale. Unlike their predecessors at the height of the pandemic, buyers can now afford to take the tires off before jumping into a transaction.

Most painfully, mortgage rates have jumped to 7% from their record low of less than 3% in 2021, which has not only deterred potential buyers but also changed the calculus of many sellers. With most people having to turn around and buy another property to live in, even those who profit handsomely from a sale find it difficult to upgrade their homes, given rising borrowing costs. The summer promises to be cruel for sellers who are not ready to accept this new reality.

Of course, it could always be worse. There is no sign that house prices are about to collapse, and there are more sales now than a year ago. After all, people have to move for a wide variety of life reasons; Damn mortgage rates. The number of homes for sale at any given time is also increasing, meaning we are getting closer to a “normal” market. The housing ice age is slowly thawing.

But the peak months for home sales, which last from spring to mid-summer, could bring a rude awakening this year. Those who hoped that lower mortgage rates would grease the wheels of the housing market, causing more buyers to walk away and drive up home prices, are realizing that this dream scenario will not come true. Sellers may still have an advantage, but it is diminishing.

When hopeful sellers call Eric Peterson, a real estate broker in Austin, he usually asks them how much they think their home could fetch on the market. In 2021 or 2022, before rising mortgage rates crushed buyer demand, people generally thought their homes were worth far less than they could sell for them, Peterson told me. Now, when he asks the same question, “they usually go a little overboard,” he said. In comparison, whiplash can discourage today’s salespeople. Austin has been among the cities hardest hit by the pandemic hangover, with local home prices in March down about 12% from the May 2022 peak, according to the Home Price Index Freddie Mac. But even though the city is at the extreme, sellers across the country face similar circumstances: There are fewer buyers and those who are looking have more options.

“The further we get from the peak of the market,” Peterson told me, “the harder it is to deny what happened.”

The start of 2024 seemed to bring together all the ingredients of a good time for second home sellers. Inflation was slowing, meaning the Federal Reserve could soon declare victory in its war against rising prices and begin cutting interest rates. This, in turn, would lower mortgage rates, theoretically encouraging more buyers to enter the real estate market. Sellers would have the upper hand in two ways: A new wave of demand would drive up the value of their homes, while lower borrowing costs would make the move to their new home less painful. Unfortunately for potential sellers, this Goldilocks scenario was not supposed to happen. Inflation has been higher than expected and the Fed has indicated it is prepared to keep interest rates high for longer. Mortgage rates have not fallen: in fact, they have increased by about 0.6 percentage points since the start of the year. Selma Hepp, chief economist at real estate analytics firm CoreLogic, calls it “the year of the fake boss.”

The further away from the market peak, the harder it is to deny what happened.

Now, potential sellers are considering the opposite scenario to the hoped-for scenario. On the one hand, their lower mortgage rates now seem like a gift that won’t come again, making it difficult to commit to a move. About 58% of outstanding U.S. home loans had interest rates below 4% at the end of last year, according to the Federal Housing Finance Agency. If you put 20% down on a $400,000 home, the difference between a 4% mortgage and a 7% mortgage would be $600 in payments each month. You can see why this is bad for both buyers and sellers: buyers can’t bear to pay that much more for the same house, while sellers keep the rates they got when money was cheap during the COVID-19 health crisis.

But many people still have to move even if they don’t necessarily want to, and some sellers may be accepting that rates aren’t going down. Once this reality is assimilated, these sellers will be faced with a less favorable real estate landscape. As more listings hit the market in the spring and summer, the number of homes for sale at any given time, also known as active inventory, is expected to increase. Inventory nationwide is up 33% from last year, according to housing data firm Altos Research, giving buyers a better chance to negotiate down prices and obtain concessions.

Sure, sales prices in March were up about 6.6% from last year, according to Freddie Mac, but leading indicators for deals that will close this summer “are not as strong,” said Mike Simonsen, president of Altos Research. in a recent weekly update. Prices for new listings across the country are virtually flat compared to a year ago, and 33.5% of single-family homes on the market saw a decline from their original asking prices, the largest month in April for a decade. Moody’s Ratings now expects home values to rise a measly 1% this year, following a 6.5% increase in 2023.

Even once a price is agreed upon, sellers may face higher costs than before to complete the transaction. Unlike the height of the pandemic, a buyer might be able to get the seller to pay for closing costs or costly repairs that arise during an inspection. More than a third of sellers gave concessions to buyers in the three months ending Oct. 31, Redfin found, up from 27.6% two years earlier.

Sellers across the country won’t feel the pain in the same way – in fact, many will do just fine. In the Northeast and West, active inventory is still more than 30% below 2019 levels, keeping competition for housing tight. The situation will be tougher in places like Austin or Boise, Idaho, where wealthy out-of-towners have driven up prices amid the pandemic. Now that people are moving less across the country, it’s harder to find the type of buyers willing to make outrageous offers for their share of the Sun Belt.

“When we listed homes for sale and they sold for much more than the asking price, there often wasn’t a second buyer who offered anywhere near that final price,” Peterson told me. “So the market was very emotional in a sense. And I warn everyone: It only takes one buyer to walk away.”

Libby Levinson-Katz, a Denver broker and chair of the local association of realtors’ market trends committee, said she advises sellers to price their homes conservatively and take care of items expensive, such as major repairs, before listing them. Price-conscious buyers are already struggling with high rates and home prices: they don’t want to take on more expenses as soon as they get the keys.

“I think sellers need to kind of buckle their seat belt and know that it’s not necessarily going to be a quick sale,” Levinson-Katz told me. “This could take a while as buyers are very demanding at the moment.”

Lost in all this talk about seller woes is the simple fact that more home inventory is good for everyone. Sellers simply had too much power during the pandemic – the pendulum swinging the other way just means we are slowly moving towards a more balanced market.

For one thing, many sellers also end up being buyers themselves: 78% of homeowners say they plan to buy again right after selling, according to John Burns Research and Consulting. So while it may be nice for sellers to see the value of their home climb with each desperate offer, they will likely have to join the masses clamoring for listings or worrying about the new reality of mortgage rates.

Sellers need to kind of buckle up and know that it’s not necessarily going to be a quick sale.

Because Americans view their home not only as a refuge but also as an investment vehicle, a weak seller’s market can also be a problem: If prices fall, buyers may not want to purchase a home, for fear of ‘catch a falling knife. This is why economists talk so much about the need for a balanced market, rather than one that simply favors affordability for buyers. It’s a fine line to walk.

While slowing sellers may be good for the nation’s real estate market in the long run, this sudden change can leave homeowners feeling like they’ve missed the boat. About 79 percent of recent sellers in a Realtor.com survey said they wished they had listed their home sooner to take advantage of a hotter market. But Peterson told me he tries to keep things in perspective for his clients: Home prices are still up nearly 50% from the start of 2020 nationwide, according to Moody’s, and about 42% in Austin. He cautions sellers against comparing themselves to those who sold at the market’s peak, when cheap money drove prices up. Back then, it didn’t matter if you mispriced your home or neglected repairs: low interest rates and growing buyer interest virtually guaranteed you’d find a more-than-willing taker.

“It can always be difficult to tell someone they were lucky because it makes you seem envious,” Peterson told me. “But interest rates of 2.5% can hide a lot of errors.”

James Rodriguez is a senior reporter on Business Insider’s Discourse team.