Why Is Everyone Buying Houses?

Why Is Everyone Buying Houses?


It would appear that *everyone* is buying houses.

Or at least that is what the recent headlines would lead us to believe. News outlets picked up the National Association of REALTOR'S® report that home sales jumped 24.7% in July from June. Here in the Front Range of Colorado, the Denver Metro Association of REALTORS® reported that the average sales price of a detached single-family home jumped to over $600,000. Both of those statistics would make you think that we are experiencing the same bullish run as the stock market.
But those two statistics are completely misleading, because that is not how we monitor the health of the real estate market. For one, the most reliable data point on sales prices is median sales price, not average. Secondly, month over month data is also irrelevant, or shall we say, misleading! One month, or even two months doesn’t make the trend – um, anyone remember March and April 2020?

What trends are pertinent?

So the relevant numbers are over a longer period of time. Twelve months usually works good because it evens out the seasonality of the year. In many housing markets, but especially in the Front Range, activity and prices rise in the spring and soften in late summer/fall (BTW this was even the case in 2009-2010 when prices were bottoming – spring of those years saw a rise in median sales price).
This year our spring buying season got pushed from March-May => May-July.
The Denver-Metro saw a record July in terms of closings and pending sales, but, YTD sales volume is still 9% behind prior year data. So, we are not on a record pace for the year in terms of sales; though pricing at the moment has been very strong.
Again, I only need to look at one chart to tell what’s happening in the market: supply and demand. This is my favorite chart, the one I look at every month to give me an indicator.
And it says: not enough sellers. When people are buying at the same rate that homes are being listed, prices have no where to go but up. But we don’t experience that phenomenon entirely throughout the year, and the last few years that gap has finally begun to widen – until COVID.

Interest rates do not drive demand per se

The other myth I want to dispel: “interest rates are driving demand.”
Simply put, that does not happen. Nobody – and I mean nobody – decides to buy a house because interest rates are low. Interest rates make housing more affordable if the buyer is getting a mortgage. That’s it. And, with the run-up in pricing over the last couple of months, one could argue that low-interest rates are having a neutral effect on many buyers – they paid more for a home even though the interest rate was cheaper – so net-net, their monthly payment stayed the same.
Roughly speaking, rates were down anywhere from half an interest point to a full point or more. One percent of interest is approximately equivalent to 10% of purchase price in terms of a buyer/borrower’s monthly payment.
So while interest rates don’t cause a person who was out of the housing market to jump in, unless it was purely an affordability issue – and as I just said, with higher prices, the buyer’s payment is still about the same. On the other hand, record low rates may cause people to spend more. I have experienced more than a few buyers recently who essentially said, ‘with rates at under 3%, who cares if I spend another 50-grand?’
Of course I never make that case to my clients. Most people don’t stay in their homes for 30 years, therefore at some point sooner than later, they are going to sell their home. That extra $50k is going to matter if the market has not gone up to cover the extra money they spent.

What’s ahead?

I suspect we will begin to see a softening this month and into September as people start to deal with: a) kids going back to school and b) going back to work from summer vacations (yes, people did take vacation). Historically September is a slower month for real estate, where inventory builds and prices soften before the year end tick up.
I am going to go on record (again) and say that September and October will not be like this spring/summer boom. The election cycle, plus any other downstream effects of the pandemic could easily impact what is already a typically slower time of year. I believe we will see a building of inventory and softening of prices. Whether that continues into 2021 or not – that’s too soon to say.

Work With Steven

Whether you are buying or selling, you are hiring an agent to advocate on your behalf. Often the key to success is knowledge - and the wisdom to use it. He has more knowledge than most, and he put it to use to get my clients what they want. All the while making the process easy and graceful.

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