Momentum Realty

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Irrational Exuberance - Don't Turn a Blind Eye

...to Rising Interest Rates and Real Estate Prices

Two days ago I publicly stated that we are “at or near” the peak of the residential real estate market.

Of course, no one knows the future, yet multiple data points are flashing Yellow or Red and are becoming harder and harder to ignore.

Indicators of a shifting market:

  • Price drops

  • Homes coming back on the market

  • Buyers becoming more picky in negotiations

  • Credit quality of buyers deteriorating

  • A whacky phenomenon of some homes getting 10 offers and others getting zero

  • A slowdown in the number of showings and number of offers per home

  • Home sitting on the market longer

When a shift occurs, it’s almost as if someone turned the lights off at the party.

The hard part for many real estate agents today is that many have become normalized to the fast-paced environment of the market over the last two years.

So it’s likely you’ll hear the lower producing agents or transactional agents shouting “fire” from the rooftops as they decide to not renew their memberships with the National Association of Realtors as they wait out the storm.

Meanwhile, the top agents or agents who are relational in nature will rejoice in this “correction” as a massive opportunity.

The truth is: those who make it through the shift will end up with more customers per agent and pick up market share.

I personally think the market peaked 2-3 months ago when the median income for the area no longer supported the median sales price (another indicator). We will start to “feel” the shift in the market heavily in August 2022 when school starts and it will start to show up in the data at that time.

Although I am highly confident in the direction of real estate sales (we will have fewer sales moving forward, the sales will take longer, and weak agents will drop out), I am less confident in predicting the magnitude of the peak to downturn cycle (i.e. home price direction or stagnation).

One problem with predicting the change in price magnitude is that every single neighborhood and zip code is different (just talk with Zillow about their Cash Home Buying Program that failed and their stock lost 75% of its value). Using averages just isn’t effective in a hyper-local industry.

Yet I do know one thing: when interest rates go up, asset prices come down. And lowering asset prices is exactly what the Federal Reserve is looking to do.

Whether we have a raging crash, a slow crash, or just a blip, the market is now different and agents must change with it and remain hyper-focused.

Ignoring change or denying risk and peril is the 3rd Foundational Step of Decline in How the Mighty Fall by Jim Collins.

Pretending the world is just as it was, doesn’t help you, your clients, or your pocketbook.

So it’s time to get real, get right.

  • Price and interest rates have soared

  • Demand is softening while supply continues to ramp

  • Buyers are becoming scarcer

  • A classic Cyclical Peak is forming in this Early Cycle Industry which will precede a true Downturn.

  • For industry professionals, it is time to prepare for a shrinking pie (yet adjust your plan to take a bigger slice).

Agents in this market environment can get ahead of the shift’s impact by padding their cash reserves (6-12 months of operating cash), evaluating what precisely is necessary in their business to operate effectively, educating their customers, and by doubling down on relationship building.

If you have any comments, drop them below. If you’d like to connect more with the author, email jon@movewithmomentum.com