😞 Home Sellers Are BROKE!
I’ve got some serious news to share today - our residential real estate inventory is tight. Like really tight. Tighter than your pants Thanksgiving day. And you know what that means? There's not many houses on the market.
One of the reasons for this tight inventory is that sellers can't afford to sell. Yes, you heard that right. Sellers can't afford to sell. How does that even make sense? Usually you get money at the end of a sale, right? Well, it turns out that sellers still need a place to live even after they sell their home, and if they go buy a new place the higher interest rates have made it so that they’ll be paying a LOT more on their monthly payment… In fact the payment might be so high that they can’t qualify for a new loan of the same amount as their current loan.
Let's take the example of Bob and Suzy Winklebriches. They bought their starter home with a 0% VA loan for $450,000 in March, 2021. Fast forward two years, and they've had a few litters of kids that are now crawling around their 2 bed, 1 bath midtown bungalow. They think it over and decide to move to the suburbs to get a 4 bedroom house. But guess what? If they make a new purchase with the same price and amount of debt, their monthly payment would be 50% higher!!!
Sorry kids… it looks like the FEMA tents in the backyard ARE HERE TO STAY.
Usually there is a certain percentage of sellers in a market that are “move up” sellers that are typically in their 30s and 40s and are selling a smaller home to buy a larger one. Because of the current rate environment, folks are really disincentivized from doing this because they’ll really feel in their wallet so a lot of people are just … staying put and dealing with it.
How long will this last? Well, I’m not sure, but I imagine some of this inventory will become available if rates drop. We could also see some become available slowly over time as prospective buyer’s wage growth increases their income so they can afford the higher payments. In all reality some of this inventory might be sidelined indefinitely because it’s pretty hard to stomach giving up a 2.75% interest rate to go buy something at 6.5%.
Comments (1)
Lower rates aren't the answer. Much like the Fed believes we need to have pain in the labor market to bring inflation in check I think there needs to be pain in the housing market to make it right once again. The pain is going to come from the have to sells. Death, inheritance, divorce, job loss etc. These sellers will have to take their money and either buy less with it or blow it on whatever. Either way these folks need to loose. There is so much cash out there just waiting to be used and pent up demand that lower rates will release it all in a money tsunami if you will. I'd argue rates returning to 4% would drive so much demand into the market prices would climb all over again. The argument about people being locked in so true. I have a few houses I'd love to turn but can't. I'm not broke in any way but why sell one $400k house to buy a $400k house in another city to pay more per month? Move up is even more ridiculous a proposition. There's no free lunch, the pain has to come at some point for someone.
Perry R., over 1 year ago