A late run-up in mortgage rates and an ugly standoff in Washington D.C. appear to have spooked the real estate industry as RISMedia’s Broker Confidence Index (BCI) skidded in May, falling to its lowest reading of the year.
As mortgage rates simultaneously reached a six-month peak, both real estate professionals and consumers were bombarded with headlines about the consequences of a debt default as political brinkmanship steered the country nearer to disaster. That crisis was averted, but the confidence of leading brokers in their industry took a blow, as the BCI dropped from 6.9 to 6.3.
Brokers were split on what affected their confidence. Gerret Snedaker, managing broker at Better Homes & Gardens: The Wine Country Group in California, said his confidence was boosted by the “belief” that the country would “get over” the debt standoff. John O’Reilly, broker/owner of Better Homes and Gardens Base Camp in Virginia, said that “changing rates (are) changing buyer and seller behavior,” even in the short term.
There has been little clarity about what the transition to a post-pandemic market will look like, even as we approach the halfway point of 2023. Sales are generally lower across the country, but prices have held strong in most regions, defying the expectation of a major crash or correction from recent highs.
Demand has also fluctuated, as mortgage rates hovered in the low 6% range. A handful of brokers mentioned a lack of buyers as affecting their confidence in May, but largely the focus was inventory, rates and the aforementioned debt ceiling clash.
“My confidence is most affected by low inventory tied to former mortgage rates, said Bret Snyder, licensed partner with Engel and Vӧlkers Montana.
Whether the BCI stumble is a blip or signals deeper struggles in the real estate market remains to be seen. The index remained flat for much of the year, after surging back in January from historic lows in the winter.
Where we are headed
An upcoming decision by the Federal Reserve on whether to raise interest rates or not at its next meeting promises to have an outsized impact on real estate, as mortgage rates weigh on affordability and discourage many owners from listing their homes. The effect of a potential hike promises to have both immediate and longer-term consequences for real estate, as the industry is quicker to react to rate changes than most other sectors.
Last month, 45% of brokers cited rates as one of their chief concerns—a huge increase from the 13% who cited rates in April, when the average 30-year fixed mortgage fell to 6.27%.
What has persisted, though, is concerns about inventory. An issue that became especially apparent during the pandemic but which goes back much further, a lack of new builds and a woefully insufficient supply of affordable units has left buyers fighting for every listing, and depressed activity across the board.
Last month, almost exactly half of brokers cited low inventory as a challenge in their market. In April, it was almost two-thirds (65%).
While there have been some indications of near-term relief, most experts agree the challenge of building enough houses—in the right places, in the right price ranges—remains a complex and long-term problem.
In May, brokers were also asked where they expected to find more buyers and sellers, as the pandemic and other factors have shifted some of the long-term patterns around who is transacting real estate.
Particularly notable was the high expectations for a surge of first-time buyers. While that demographic has traditionally made up slightly more than a third of all buyers, that number fell to an all-time low during the pandemic (26% in 2021, according to NAR).
On the sell side, job relocation moves also fell significantly over the last couple years, meaning that brokers may be hearing rumblings of some return-to-office trends, or possibly seeing more evidence of persistent job-hopping—even as broader economic data indicates the “great resignation” may be losing steam.
Expectations for more retirees and downsizers could also prove prescient, as some initial, regional data provides evidence that older people retiring or passing away has created some inventory.
Those same surveys also found an unexpected rebound in first-time buyers, which, assuming the trend is present in other areas, would closely match expectations laid out in the BCI.