Buyer’s Market vs Seller’s Market – Where are We and Where are we Going?
Many have felt the effects of COVID-19 on the local real estate market. While no one is 100% sure where this all leads, there is some consensus among professionals. I’m here to share that information today but first it’s important to understand what a buyer’s market vs a seller’s market is.
You’ve heard the terms before and most know them simply as favoring one versus the other. But there is a very specific and very easy way to define favoring markets. It’s simply a matter of calculating inventory, otherwise known as the amount of houses that sell every month versus how many are currently on the market. To say it in numbers, if 10 houses sell every month and there are 30 houses on the market, then there are 3 months of inventory.
It should come as no surprise that Philadelphia and its surrounding counties are currently in a seller’s market. Different neighborhoods and area can all have their own inventory. Some may have 2 months while others have 3-1/2 months but they are all solidly in a seller opportunity zone.
Low interest rates, massive growth and a strong economy have made for one of the longest seller’s markets in Philly’s recent history. Some areas have seen as much as 25% appreciation since 2016 leading to further investment and growth. It’s been unreal being here through it all!
The Immediate Effects of COVID-19
In case you haven’t heard, there’s a pandemic going on and it’s led to the disruption of quite a few industries. In the case of real estate, a people business that involves going into strangers’ homes, you can imagine that we’ve seen a bit of a slow down. The exact number from a couple weeks ago was that nationwide, we’re down 70% on showings. I’m sure that it has increased since.
Inventory has remained stable for the simple fact that very few homes are coming on the market and very few are being bought. So we’ve seen a balance that hasn’t shifted us out of the market favoring the sellers right now.
This is where it gets interesting. Agents aren’t putting new listings on the market but that doesn’t mean that they don’t have the houses to sell. Many predict that as soon as the shelter-in-place order is lifted, we could see a flood of houses hit the market. Sellers fearing that the price of their homes will be decreasing soon, will try to get the house sold ASAP. But will the buyers buy?
The Unfortunate Position of Renters Right Now
Just like so many homeowners, a lot of renters out there are having trouble paying their bills and this includes the rent to their landlord. Now while the CARES Act has suspended evictions for the time being, it did not offer the same forbearance that many federally owned mortgages received. Many landlords have in fact offered a reprieve on the rent however same as the mortgage, it’s not a forgiveness of the amount owed.
Let’s look at the numbers on this for a moment. Let’s say a person needs a 3 month forbearance. For homeowners, most banks are adding those payments onto the end of the mortgage and extending the life of the loan. When your mortgage is 30 years or 360 months, 3 months is .83% of the entire loan. Most will barely feel that at all and will have time to adjust. For a renter though, 3 months of a 12 month lease is 25% that is due at the end of the lease, which is only a few months away.
Most will not be in a position to pay what is owed all at once and will have no choice but to extend their lease another year to try to pay that off over time. This means that many renters who would have been buyers this summer, will have no choice but to continue to rent. Thus we begin to see inventory build.
Market Predictions
I currently have a few buyers that I’m working with and the results are mixed with their expectations. Buyers that are ready to pounce on the right opportunity and are excited for the idea that new inventory could be coming soon. Another that had put an offer in right at the beginning of the pandemic and then pulled the offer and wanted to sit on the sidelines for at least 60 days.
From talking to clients, agents, mortgage brokers and other experts, I believe that we’re going to see a flood of buyers that also jump into the market, ready to buy a house and lock in a low interest rate. This will be driven by pent up excitement and the simple fact that life will feel a bit normal again when we’re released back into the world.
However, I do believe that it will be short lived. As investors work as fast as they can to finish their projects and people that have been planning to move take action over the next 6 months, we will continue to see inventory come into the market but the buyers will have disappeared. Where did they go? They went broke, that’s where…
Where did all my buyers go?
People that are prepared to purchase, were already in a position to do so. They have taken the steps to prepare themselves both financially and mentally to become homeowners and they will be the ones to excitedly jump into the market. This is also true for “Trade Up” buyers. These are people that are selling one house to settle into a longer term, and usually larger, house. There’s a necessity to move, usually due to outgrowing the current house and wanting to prioritize schools.
People are feeling the financial strain of the pandemic and those that would have become buyers 6 months from now, could end up sitting on the sidelines for at least another year to recover. There’s also those that think waiting another year, could yield them a much better deal if prices do drop.
Lenders Tightening Standards
When a crisis comes into the financial sector, banks are less likely to take risks. Banks see the current real estate market as one that is now more risky to lend on, thus some of the mortgage products that allow for less than 20% down, are starting to disappear. Chase has already announced that they will not originate a mortgage for anyone with less than 20% down and a 700 credit score. If you’re thinking, “that eliminates a lot of folks”, then you would be correct.
The banks are already tightening their standards to require more money down, higher credit ratings and a lower DTI (debt to income ratio). This practice will eliminate many would-be buyers from the market that will have no choice but to continue to save more money to make that purchase. But if those buyers were looking at 3%, 5% or even 10% conventional loans, then the difference to 20% can be insurmountable.
FHA loans will become popular again since they are federally backed and require only 3.5% down. However FHA comes with many drawbacks such as permanent mortgage insurance and extra inspections during the purchasing process.
Final Thoughts
Real estate doesn’t move like the DOW. Changes in price and inventory take months or even years to make drastic moves. Philly has seen one of its longest seller’s markets in history and I believe that it’s coming to an end.
When the shelter-in-place order is lifted, I expect to see listings hitting the market and selling almost immediately. I also think this will go on for a month or two and everyone will think market conditions have normalized. Then slowly, listings will sit longer, more houses will come into the market, loans will become harder to get and prices will start to adjust to stay competitive. By Spring 2021, I expect that we may be looking at the first buyer’s market in over 11 years.
I don’t believe we’re going to repeat the crash of 2007 and that’s an important distinction between then and now. It’s healthy for real estate to adjust between sellers and buyers markets and this is going to be just that; a healthy adjustment. Did I expect it to come in the form of a deadly virus pandemic? No I did not. But this is a normal phase of every real estate market and one that we all must go through together.
Thinking of selling your home? I’m passionate about helping sellers get the most for their house and hitting their goals!
I service Philadelphia and its surrounding counties such as Montgomery, Delaware, Bucks and Chester counties. Call/text me at 267-825-1192 or email me at chris@chrishvostal.com.
