Frankly, we real estate agents are confused, too! Homes that would have attracted bidding wars a few months ago are sitting on the market — attracting few showings and no offers.
But it’s really a tale of two real estate markets, because there are “special” homes which still attract bidding wars. It’s the “ordinary” homes which are not getting any love — tract homes, mostly.
The trigger for this change, as we all assumed, was the abrupt increase in mortgage interest rates which occurred around April 1st, combined, no doubt, with a sinking stock market. There are investors who have already sold those stocks and are cash rich, but there are also investors who prefer to hold their depreciated portfolio and wait for the stock market to recover.
Buyers who can pay cash are unaffected by the rise in interest rates and continue to bid against fellow cash buyers for the “special” homes, especially million-dollar homes. They no doubt appreciate the reduced competition for those homes with the reduction in the number of buyers who depend on mortgage financing.
According to data obtained from REcolorado, the Denver MLS, there has been a negligible increase in the percentage of cash versus non-cash closings, but the rise in interest rates will likely be a factor ongoingly.
The one statistically significant change I spotted was an 80% increase in closings for homes over $1 million in the 2nd Quarter compared to the 1st Quarter of 2022. This compares to less than a 50% increase in the sales of homes priced between $500,000 and $800,000. I would normally expect the sales of those lower-priced homes to increase during the “selling season” at least as much as the homes over $1 million.
The chart above shows a sharp drop in total MLS sales this June versus the June of 2021, but there’s a longer trend at work than I didn’t suspect before creating this chart using REcolorado data. Notice that 2021 was the peak year and that 2022 showed a month-to-month decline in year-over-year sales for the first six months of the year. The drop in total sales only became significant in June, probably reflecting that change in the mortgage market.
You can also see that 2020 — the year in which Covid-19 appeared — was showing significant growth until the lockdowns occurred in March, resulting in a dramatic drop in total MLS sales, but only for the two months I highlighted in yellow. Then we saw a huge upswing in June, probably due to pent-up demand from April and May.
The question on everyone’s mind is where do we go from here?
My crystal ball is foggy right now, but I think mortgage rates have risen as much as they’re going to this year, and may even moderate in coming months, during which time buyers will come to accept rates in the 5% range as historically “okay,” which they are. We were spoiled by the 3% rates that we enjoyed in 2021, but the memory of those rates is fading. Unless the economy enters a recession, I feel that buyers will return to the market and we’ll see another surge from those buyers who have stayed on the sidelines these past couple months. Then homes which would have sold in less than a week a few months ago, will start moving again.