This question is top of mind for anyone thinking about buying or selling a home right now. While it may feel like the bottom is about to fall out of the real estate market, the reality is that we are leveling out to a very healthy and sustainable market.

To understand why the real estate market won't crash, we have to look at data and history.

Supply & Demand

Over the past 50 years, home prices have averaged an increase of 3-4% year-over-year. Let’s take a look at the price increases for the past few years:

2020 - an increase of 29%

2021 - an increase of 18%

2022 - an increase of up to 8% (estimate)

2023 - an increase of 3-4% (estimate)

Maintaining double-digit increases simply isn’t sustainable. By returning to a more reasonable 3-5% increase, homeowners are still gaining equity and new Buyers can enter the market.

Ultimately, supply & demand drives home values. If the supply of homes is lower than the number of people looking to purchase, we will remain in a Sellers’ market. For home prices to decrease, a larger percentage of homes need to become available and we don’t see that occurring anytime soon. The current supply of homes is ¼ of what it was in 2007. There are four main reasons why our current supply is so low.

1. New home construction is down.

The pandemic shut down home construction for months. When building resumed, contractors faced supply-chain shortages and increased costs for lumber and building materials. Builders are just now starting to catch up.

2. Foreclosures are down.

Foreclosure moratoriums and homeowner assistance programs during COVID significantly reduced how many foreclosed homes became available. But don’t expect many foreclosed homes to hit the market now. A strong employment rate and high home equity over the past few years mean fewer homes are facing foreclosure post-pandemic.

3. Millennials are now home Buyers.

Millennials range in age from 26-41, which is the prime home-buying age. This group is not only looking for their first homes but is also ready to upgrade to larger homes as their careers expand and their kids get older. There are 10 million more Millennials than Gen Xers, which translates to 5 million more people looking for homes than were looking 10-15 years ago.

4. Big Institutional Investors.

These Buyers are defined as companies, corporations, and LLCs, most of whom make cash offers. In 2021, 28% of homes were purchased by institutional investors, giving the average Home Buyer a major disadvantage.

As the data shows, we won’t see a real estate crash because there are still too many Buyers for the number of homes available.

This is a decent time for both Sellers and Buyers. Sellers may not be receiving multiple offers above the list price but homes are still selling close to the asking prices. Buyers can expect fewer bidding wars, which means they will pay fair market value rather than over-inflated value. We can also expect the process to return to normal. Gone are the days of waiving inspections and appraisals.

Mortgage Rates

Recent increases in mortgage rates caused many people to think that home prices would drop because some Buyers would be priced out of the market. This is where it’s essential to look at historical data. Never before had we seen interest rates as low as they were during the pandemic. The chart below shows the interest rates over the past 45 years. As rates fluctuated, home values continued to rise an average of 3-4% annually. Even in the 1980s, when interest rates were in the 18% range, homeowners continued to gain equity.

For younger Buyers, the mortgage rate change feels especially drastic since they’ve only experienced extremely low rates during their home search. It is also the first time people under age 35 have experienced a challenging economy. So while the rate changes may seem extreme, they are still historically low. 

We also can’t ignore how the media is influencing new Buyers. HGTV and other home shows have established a baseline for what people can expect for their first home and in many cases, it just isn’t reasonable. Buyers may have to grieve their “dream home” and admit it simply isn’t affordable at this time, or they will need to purchase a fixer-upper and put in some sweat equity to make improvements over time.

Even with higher interest rates, it is still a good time to buy. Houses purchased now are estimated to increase by 3-4% over the next year. Don’t miss out on that equity and face higher prices next year. If/when interest rates go down, new homeowners can refinance to get the lower rate. Bottom line, don’t wait; buy now to start building equity!

PORTLAND METRO REAL ESTATE CONDITIONS

The average sold price is $631,000, which is down less than 1% from the previous month but up 8.5% from the same period last year. Homeowners have recognized incredible growth in equity for an extended period of time and now, home prices are cooling but significant value is not being lost.

FINAL THOUGHTS

These numbers are in line with the historical data and further emphasize that we are a long way from seeing any kind of real estate crash. Sellers have reaped the rewards of double-digit value increases and have significant equity in their homes. Expectations of continued quick value increases must be shifted towards the comforts of stability. Buyers may have to adjust affordability expectations with the higher interest rates, but now is still a good time to purchase a home to build equity over time.

Let’s chat and see if this is the right time for you to buy or sell a home.