2022 Macro Review
Recapping our predictions for 2022 – At the beginning of the year, we reminded readers that all market conditions are transitory. The Only Constant in Real Estate is Change. The sellers’ market would have to cool off eventually. We assessed that certain market factors would work to support pricing; low inventory, new construction costs, an influx of nonresident buyers, and historically low-interest rates. We suggested that prices would likely stay strong because the first three factors, low inventory, new construction costs, and a disproportionately deep and diverse buyer pool, were likely not to change.
We anticipated the exposure was interest rates. Interest rates could not stay suppressed forever. We could not predict when they would start to rise, but we knew (because most of the world knew) rates had to rise, and it was only a matter of time. Having gone through past periods when interest rates had risen, the experience was that they tend to move fast, and the impacts will seem immediate. And finally, we suggested the psychology of interest rates was likely more the issue than the actual rates. Historically, a 6% mortgage rate is considered “normal” or desirable. But in the environment of 3% rates, that doubles the cost of funds. Yes, rising rates will inherently reduce the buying power of many prospective buyers (who buy on a monthly payment rationale). However, the real impact is the gambler’s mentality – “I’ll just wait to buy when rates come back down.” This rationale can be pervasive, which is the greater risk to the volume of the entire buyer pool – it can hit every price point.
Actual 2022 market performance
Contact us for a detailed home-by-home review of activity in your neighborhood. We are happy to dive deeper into the analysis if you (or a number of neighbors) would like to meet.
Sure enough, the ride of the Seller’s Market continued without interruption in the traditionally quiet winter months and into the Spring. All the market factors supporting pricing we felt would stay in place did. Low inventory seemed chronic – what seemed like a dozen or more buyers, with multiple offers for many homes. Forget stabilizing; new construction costs continued to escalate much faster than any measure of the official inflation rate. The costs of Land, materials, labor, and more just kept going up – there was not enough of anything (and yes, the “Supply Chain” excuse was used for most everything). And finally, the influx of buyers from what seemed the entire country (and beyond) ensured the buyer pool operated like it had no bottom. Home pricing appeared to be on a parabolic curve straight up.
Parabolic curves cannot be sustained long. The market was looking for an excuse to pull back. It was the perfect environment for those who control interest rates to implement desired rate increases. However, those of us with our finger on the market saw the situation change a few weeks before the first Fed. rate increase. The Fed. controls what it can – its rate. It cannot control the actual Cost of the Capital market. “The Market” anticipated the rate increase and started raising consumer rates. Car loans and mortgage rates increased in the consumer market. We saw the change a few weeks earlier than this – when lenders were marketing their low rates but were not getting loans processed. Lenders did not want to own any more loans at those rates. We were convinced the market change was now imminent. As mentioned in our 2022 newsletter, we saw what we felt was totally to script. We had seen this all before. Rates ticked up, and the buyer pool almost evaporated – it seemed as though overnight. This stop seemed to hit most every price range. Rate increases will fundamentally impact the lower price ranges disproportionately – Buyers who are more likely to buy on a monthly payment budget. But the negative effect on the rest of the price continuum was what we call the “Gambler Mentality.” When people’s friends tell everyone at social events about their locking in a 3% mortgage rate (true or not), no one wants to be the pitied soul who accepted (and locked in) 3.75+% – so they became determined to step out of the market and wait. The mistake was that rates kept increasing, effectively locking these rate-sensitive buyers out of the market.
As we had seen before, the market masses predicted the next psychological move. These frustrated buyers were leaving the market and not getting a home. Now, they were not the pitied soul at the social gatherings who settled for an extra .75+%. They were the even more sorrowful “person who missed getting a home in the greatest interest rate market in their lifetime.” Rates had continued to rise a couple of full points. However, unanticipated by many, rates ticked down slightly. These frustrated people piled into the market in the late summer for fear of missing out totally (and to avoid continued social judgment). Home sales that had trailed off from few (due to low inventory) to near none spiked back – briefly. The investment industry has a term for such a situation – the Dead Cat Bounce. I know the analogy seems much more humorous on an investment firm trading floor, but the analogy holds from stocks to real estate – the bounce was brief and lacked conviction. The pent-up demand was absorbed in a few short weeks. And then the traditional slowing of the markets ahead of the holidays reinforced the fundamentally weak market, and little has happened since.
Throughout the year, the intense pressure to compete to buy a home brought many purchasing tactics generally seen in the roller-coaster markets like the West Coast. We had kept abreast of these hither fore “ridiculous” tactics, so we were prepared to deal with them when representing our sellers and combating them when representing our buyers. While these tactics seem to have been readily adopted locally, the cautions against them do not change. Their potentially “reckless” outcome does not change just because “everyone” employs them. While even in the hyperbolic markets of the coasts, these strategies ultimately leave many buyers upside down, in our generally stable market, the problems are potentially magnified. Bidding Wars that run up individual home prices have always been questionable locally. Importing tactics such as Escalation Clauses, Appraisal Gap Guarantees (or no appraisal in a Cash Sale), waiving inspections, etc., took caution and tossed it out the window. When considering these tactics, we coached our clients, Buyers and Sellers alike, about their pitfalls. We often found ways to outperform the market by employing more creative and sound tactics that did not leave our clients as exposed.
There is a second part to this report, “Our Clients’ 2022 Results,” that we can share with you that goes into some of this in more detail. Yes, our selling clients had a wide variety of individual successes. Equally rewarding to us is that our Buyers outperformed the competition. Not only did they tend to win multiple-offer situations, but they were often not the high bidder, but some were also able to buy homes for less than List Price. How, in a Seller’s Market, does this happen – repeatedly? By employing a different and arguably more sophisticated approach. If you want to outperform the market repeatedly, you must execute a different strategy. We saw some people simply pay more for homes – as mentioned, several of our clients did not have to. Simply selling a home or buying a home are not our measures of superior results. Selling or Buying – Well – is our goal. Our clients’ results are our marketing.
Many brokers found these tactics benefit their clients to “win” a bidding war. A benefit to us of these tactics was they gave us a transparent view of the market. When it appeared, in mid-summer, that a number of homes were coming back on the market (too fast for an inspection dispute), we felt it was apparent buyers “were waking up with a severe case of Buyer’s Remorse” possibly believing they had made a mistake – in being too aggressive in winning a home. They possibly called their realtors to find a way out of the deal. Initially, we saw this with realtors from homes our clients were not successful in getting under contract. The typical call from the listing broker went, “we’re calling to see if there is still any interest in our client’s home?” The first few homes in such a quandary bounced back off the market (or, not so mysteriously, remained Pending in the BLC system but with a different buyer’s agent). But eventually, homes were coming back on the market and sitting. Now they had a black eye that did nothing positive for the seller. Taking the “crazy” offer had backfired. We witnessed a number of these homes subsequently sell for less than the List Price – a clear indication the overheated demand had evaporated for at least those homes. When the music stops, not everyone gets a seat.
Working with our client’s needs and desired results, we were constantly communicating about the timing of their homes’ final preparations for Listing. Mid-summer, we anticipated a pent-up-demand rebound. So, to the clients, we suggested caution. Come September; we said, “The time is now!” and listed three homes in one neighborhood in fourteen days (two on the same day). This would seem to fly in the face of conventional thinking – three homeowners in the same neighborhood placing their homes, similarly priced, all listed essentially at the same time with the same brokerage firm. However, with our experience as a developer and home builder, we had confidence it was a sound strategy if executed properly. Most importantly, it worked. Mortgage rates dropped ever so slightly. These clients were on the market at the right time to benefit from the reinvigorated buyer pool and achieved some great results (price AND other desired terms). All three homes closed on schedule, allowing all three clients to take advantage of their next home situations. We were pleased to have been a part of their successes. The strategy should have helped the neighborhood in general as well. Three homes under contract and closing at strong prices built a solid comp. sale scenario.
The Woods-Specific Results
So how did all of this impact or play out in The Woods? The Woods seemed to have had little impact related to the local market. The number of homes sold was basically the historical average of 4. The Woods has had 2-5 (most often 4) home sales a year for the past ten years. 2022 pricing seems fairly consistent with 2021, with homes selling between $1,150,000 and $1,400,000. In my opinion, the worst way to compare higher-end custom-built homes is price/Sqft. However, comparing annual pricing within a neighborhood and how it has been influenced by inflation over time, it is more relevant. In the case of The Woods, the $/SqFt was steady from 2021 at around $240. Steady is fine, other than when most of the Market had meteoric price appreciation. Interestingly, the $/SqFt range has really not changed all that much in the past ten years. The $/SqFt range has been between $170-$225 in most years. Of even more concern is that the last home I built in The Woods in 2007 sold for $168/SqFt (and resold in 2020 for $157/SqFt), which is another issue, inconsistency. The notion The Market takes care of pricing is a fallacy. I regularly see what I feel are good and poor sales results. I’m guessing you do as well. See the attached 2022 Sales Activity Chart.
So, what is to be taken from this analysis? I believe the greatest is that The Woods does not appear, to me, to be appreciating in Value in keeping with the market. At best, results would appear inconsistent. Why do we feel this way? Because we look at The Woods in detail, but also the whole market. We specialize in the price range of traditional custom-built homes, particularly in west Carmel. We can provide you with the analysis we typically share with clients that is far more comprehensive than the 2-3 Comps normally provided.
So why is The Woods not appearing to be fully participating in the Hot Seller’s Market of 2022? Is The Woods part of some local area price anomaly? Disappointingly for The Woods, the answer is – Fundamentally, No. Yet, the curious answer is, Perhaps so. Why, and why do we think this? No, because there is no fundamental reason for The Woods not to keep up with the Market. The price range is attainable by many buyers, especially the multitudes moving in from out of state. There are other neighborhoods we feel are seeing greater success. Yes, because Buckhorn and Buckhorn Estates are experiencing similar phenomena. Only Cheswick Place, of the adjacent neighborhoods, is out-performing. The Cheswick homes are as old, and up to ten to twenty years older, yet have surpassed the pricing of homes in Buckhorn, closed the gap with Buckhorn Estates, and consistently priced within The Woods’ low to middle price range. In the very near future, we anticipate the upper end of Cheswick homes may be competing with The Woods’ upper-end homes.
So how is this happening? We can all theorize why. The bottom line is it is happening. We have seen many people try to explain away such situations with some esoteric philosophical explanations. Stop. It is not that hard. Our opinion? Cheswick homeowners have changed how they market their homes by challenging traditional strategies. If you think this is only affecting the people who already sold their homes, you need to remember their Comps. are influencing your home’s value – it may cost you money as well. If this frustrates you or is motivating you, there is a solution.
An aside for some history and perspective – Collectively, we built more homes in the neighborhoods of Cheswick Place, Buckhorn Estates, and The Woods at Williams Creek than any other builder. We have lived in Cheswick for the past 23 years and still do. Four years ago, we had a similar discussion with the homeowners in Cheswick. There was a pervasive frustration as to why their homes were not appreciating. Many were selling for essentially the same price they paid when new – 20 years earlier. We strongly suggested it was because of how they were choosing to sell their homes. From our perspective, the market awareness, approaches, and executions were delivering less than desirable results. This was the impetus for us to bring our brokerage to the Public. If one chooses their realtor on some factor(s) other than who will most likely maximize the value of their home, is it any wonder they may not maximize the value of their home? We asked Cheswick homeowners to give us a chance as a Proof of Concept. We are pleased to have earned their trust as we have become the dominant brokerage firm in the neighborhood. We are more pleased that our approach has led to the results we set as our goal – Maximize Clients’ Total Home Values. Over the past four years, Cheswick has eliminated the price differential with Buckhorn Estates and exceeded the general pricing of Buckhorn. We are pleased to have earned their trust as we have become the dominant brokerage firm in the neighborhood. We are more pleased that our approach has led to the results we set as our goal – Maximize Clients’ Total Home Values. While other brokers may have similar sounding goals, we are not aware of any who bring our experience & approach – it is our unique advantage. It is now our clients’ advantage. Importantly, it can equally be The Woods’ advantage as this
Preparation for 2023
We have no crystal ball; if we did, I believe it would be fairly cloudy this year. This is going to be a challenging year to predict. Experience and flexibility will likely be critical. Here are some of our thoughts:
Should you be catching national or even real estate industry “news,” you are likely to hear the hyperbole of terms like “Bubble” and “Crash” being tossed around. In media publishers’ current “Click-bait” environment, we might discourage over-reliance on national commentary relating to our local market. Yes, there are markets in the country that are likely to pull back. But what are the definitions of a bubble or a crash? If some of our clients’ homes sold for a few percentage points less than they did, they would still be considered overwhelming successes twelve months ago. A pull-back from these over-heated numbers is hardly a “crash.” So, will there be a crash? Unforeseen significant events can make anything possible. But with the current market dynamics, holding steady is more likely.
Pricing trends are important, but the impact of Comps is generally based upon the most recent sale(s). Neighbors’ ongoing home sales will either support, confirm or detract from past sale prices and influence our future prices. A single price anomaly is not a trend. But the behavior of several sellers, or buyers, can sustain, reinforce or reverse a trend. There are several competing motivations in the real estate market. That is fine until one segment of the market players outweighs the others – then a trend develops. The community already has a number of homes on the market in early January. This is historically a less active time in the market which can either help or hurt a seller. We work with the information we have and use it for our own planning. We encourage you to take note and do so as well.
New Construction sales seem to be slowing. While more anecdotal, we receive communications from builders featuring “homes available for immediate possession.” In other words, they have homes finishing construction unsold. This was rare over the past two years. New construction buyers were waiting in line for a builder to start construction on their homes.
We receive notices of new listings in real time. The number of such new listing notifications is noticeably low. Yes, this is one of the slower periods in the year for real estate activity, including new listings. However, Seasonality had a far less noticeable impact over the past two years. Homes were regularly listed for sale even in a significantly “lower inventory” environment.
Interest Rates do not look to be reversing from their current levels. While we anticipate the broader economy’s softening to encourage restraint in further rate increases, the Fed. may use rates to reinforce an effort to dampen inflation. The hope is that with the run-up in inflation metrics, like all parabolic curves, this, too, will have to level off on its own. Sustained percentage increases in anything have to end – inflation should not be different.
The Buyer Pool is where we see the greatest unknowns. If potential buyers from starter homes and move-up neighborhoods cannot sell their homes to the more payment-sensitive buyers, then they will not be potential buyers throughout the price spectrum. Our area has had the benefit of strong non-resident buyers. Many of our 2022 clients sold to essentially out-of-state buyers. People continue migrating out of the West Coast, Chicago, and other challenging living environments. The trend of “Work from Home,” allowing people to work from more lifestyle-friendly locations like ours, might be plateauing. We anticipate the greater threat to the Buyer Pool is in potential layoffs. In the past month or so, some notable industry sectors appear to be actively laying people off. Consumer Debt is supposedly rising again, which puts negative pressure on mortgage loan qualifications. The Silver Lining to the local Buyer Pool could be some notable corporate entities moving to the area. We welcome them with open arms!
As with 2022, timing may be more important than in the preceding couple of years. We do not promote “Market Timing” in the financial world’s concept. We do feel understanding the current Markets (national & local, and real estate specifically) and their historical seasonality is important. Ignoring this is certainly ill-advised.
There are many more factors we consider in preparing for the coming year. Planning is one of the cornerstones of our approach. While we are cautious about 2023, our community is positioned to continue outperforming “the market.” We like to say if you want to outperform the market, you cannot employ traditional market strategies. We expect to outperform the market. We Plan to increase our clients’ probability of doing so. People ask us how we are different from the traditional franchise model. Our answer is, “Most every way possible.” Our experience is different. Our approach is different. Our business model is different. And our clients will tell you their results tend to be different. You may know a couple of them. Give them a call.
Call us to discuss this review or other real estate interests. Regardless if you anticipate making a move in the foreseeable future or not, call us. We appreciate and respect your timeframe. We move at your pace. Planning is the key to improving the probability of maximizing your desired real estate results. Results are important – your results are the most important.
Morton Homes Realty