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Massive Changes in the Housing Market
Massive changes are in the works for the way we buy and sell houses. Most of you listeners have done both of those things in the past, and some of you may be getting ready to do this in the near future. If you are, it’s a very different landscape today than it was a year ago. I’m going to spend the first part of this episode talking about what has already changed so you can be prepared for the new normal of homebuying and home selling. Then I’m going to spend the second half of the podcast talking to the folks that aren’t buying or selling soon – but that may do so again down the road. There are big time changes that might be over the horizon that won’t affect today’s homebuyers and home sellers but will those a year or two down the road.
Let’s start with the new normal of buying a home today. There are two components to this new normal and the first is high prices. You might think the price of homes has run up on this side of Covid, but that they are likely to go down again in the near future. I think it is unlikely that we will see significant declines in the prices of average homes over the next few years. Here is the main reason why – the supply of houses for sale is way below historical norms. This is the case because people aren’t moving like they used to. With most homeowners in a 3%ish mortgage, many would have to downsize if they were to move. This creates a lock in effect and a lack of mobility which creates a shortage of houses for sale. Did you also know that after the financial crises of 2008, we have not been building enough single-family residences to cover population growth? Although there is a tremendous amount of residential construction taking place now and even more approved in the pipeline that hasn’t begun, there simply aren’t enough builders and workers to provide new inventory to bridge the gap of our current housing shortfall. This is particularly the case in TN where you have more people moving into the state than moving out. The demand for homes in TN is higher than the homes available for sale. And when supply is tight, prices tend to stay firm. Now prices may settle a little on the higher priced homes – but I believe the majority of prices on homes are here to stay.
The second component to today’s new normal of home buying and selling is higher interest rates. When mortgage rates were at 3%, a person putting down 20% in a 30-year loan on a $400,000 house would have a payment of about $1350 for principal and interest only. At today’s rates, let’s say 7%, a person would have to buy a $250,000 house to keep their payment the same. Think about that for a moment. A person could afford $150,000 less house than in in that lower rate environment. And 7% is actually lower than rates have been over the last several months. At one time, mortgage rates were just south of 9%. They’ve ticked down a good bit as we’ve seen more positive trends in inflation data. How likely are rates to go back to 3%? I think very unlikely. Some of you remember back when mortgage rates were in the mid double digits – 15% or so. That was an anomaly. That was so very much higher than the historical average. Well in the same way, 3% was an abnormality – just on the lower end of the spectrum. I don’t think we’ll see that again in my lifetime. What I think is a more reasonable range of mortgage rates that settles into the 5-7% range.
Regardless of where it settles in, if you are buying or selling today, these higher rates are going to completely change how you approach the process vs. a year or two ago. Sellers are going to find fewer buyers the more expensive their house is. And buyers may have to settle for a smaller house than their previous one, unless you’ve got lots of room in your discretionary income to handle the higher payment. So I think this is the new normal, whether we like it or not. In some ways, as far as rates are concerned anyway, it is actually the old normal – interest rates in a range that are still low by historical standards, but definitely higher than what we have seen in recent years. A sharp Wall-Street Journal article recently highlights that these facts are resulting in more people having incentive to rent rather than buy. They quote a study by CBRE that says the average new mortgage payment is 52% higher than the average apartment rent. For the last decade, it has been cheaper to own a home – but that is no longer the case, and that comparison is even more stark in large metropolitan areas.
How about down the road? What is changing in the way we might buy and sell houses 1-5 years from now. The way to work with your realtor is about to change. A group of Missouri home sellers brought a $1.8 billion lawsuit against the National Association of Realtors charging that the current structure of home sellers compensating both a buyer’s agent and seller’s agent is unfair. The class action lawsuit claimed that because home sellers have no control over how much buyer’s agents make, and because they are essentially compensating someone whose interest is to negotiate against them, and because the industry generally operates at a 5-6% commission structure, that for all of these reasons anti-trust provisions should be applied. In other words, the claim is that there is price fixing in the industry and a structure that does not allow competition and choice. They actually won the case. The National Association of Realtors has appealed the case, so the final outcome has yet to be determined.
But this has started a ball rolling that might end up with a very different structure in the home buying and selling process. What might this look like? First of all, sellers would negotiate a fee with a selling agent alone. That selling agent would be compensated, let’s say 3 or 4%, to sell the house. That is different than the 6% that we see today. Home buyers would also negotiate a percentage to work with a buyer’s agent. Let’s say it’s 3%. Most homeowners are not going to want to compensate a buyer’s agent 3% out of pocket, so those agents will probably be negotiating with the homeowners to see if they will cover the 3% by increasing the sales price by that amount. So at the end of the day, it might be that 6% still ends up in two different realtors’ hands, but the difference will be that it is by choice, not by default.
The NAR has countered that what will likely happen is buyers will be underrepresented – that only those buyers that can afford to pay a buyer’s agent will use one. That may be a fair criticism. NAR also counters that there will be less realtors. Also a fair criticism. Here is my guess as to what might happen in the real estate industry. The agents who are able to articulate their value and deliver that value consistently will actually make more money. The agents who cannot will end up getting out of the business. Let me close by saying I think you need a realtor whether you are buying or selling. Even if you had to pay a buyer’s agent 3% out of your pocket, if they are good, they will probably save you more than that 3% by negotiating effectively on your behalf. We cannot be objective about decisions that personally affect us. An excellent realtor can be that voice of objectivity, earning much more than you are paying them in the process. So regardless of whether the way we pay realtors changes or not, build relationships with good ones – because they are wonderful advisors to have on your team when the time comes.
We think it’s also hard to be objective about other financial decisions. That’s where we come in. You see, at MBC and Foundation bank, we don’t just provide financial products, we provide financial solutions. Maybe you are buying your first house. Maybe you are a small business owner that is ready to take the next step with your business. Maybe you are looking for creative ways to save for the future. We do all of that! Start your financial conversation with us today by exploring our website. If you’ve found this podcast to be a good use of your time, we hope you’ll subscribe to it in your favorite podcast app and share it on social media. Until our next episode, may the Lord bless you and keep you.
-President Chad P. Wilson, CFP
Today’s episode of “Money Matters” was written and recorded by President Chad P. Wilson of McKenzie Banking Company / Foundation Bank on December 12, 2023. This episode does not constitute financial advice. Please consult a financial professional to discuss your specific needs. Any rates mentioned are subject to change and are accurate as of the recording date. MBC/Foundation Bank is an Equal Housing Lender, Member FDIC.
