THE PARTY IS OVER

partygoers on couch the morning afterOk, turn out the lights.  The party is officially over.  We have had quite a run for the past few years.  But it's over.

No, it's not a crash.  We refer to these corrections as "reversions."  We went too far, too fast, and now it is time to pay the piper.  Prices have declined, and mortgage interest has left Candyland.

And it's going to stay that way.  For awhile.

The median price runup in 2020 and 2021 was about 12%.  That's an awful lot for one year.  Ultimately, that runup is not sustainable.  Sooooooo....we got to 2023 prices two years too soon.  Fortunately, the market will correct that of its own accord.

The runup was artificial.  It was caused by low mortgage rates (never to be seen again - sorry, sorry - just the messenger here) and the pandemic.  Oddly, because we were cooped up in our homes, many made a decision to sell and buy something else.  As well, since work-from-home became a thing, most people wanted another bedroom or two.  This caused an out migration from SF to the suburbs as the commute was less of a big deal and who can afford a four or five bedroom home in SF anyway?  The need for another bedroom dovetailed perfectly with the lack of need to be close to work.

And the low mortgage rates?  Gone.  For good.  While we will likely see mortgage rates decline to 4% over the next year or two, those days of 2.5% or 3%?  Gone.  Due to low inflation the Fed kept the rates artificially low and that drove the low interest rates.  The Fed has the opposite problem now, and while the likely upcoming recession will have them lower rates, they are unlikely to return to the easy money policy as the recession is likely to be short and shallow.  Think the recession of 1991.  You don't even remember that, do you?  That's because it was short and shallow.  Those come along every 10 years or so no matter what, and they don't have much of an effect on most of us.

The largest effect will be felt by Gen Z and Millenials, who are aging into being homeowners.  The good news:  if they buy sooner rather than later, they'll get their home at the 2019 price, which is about 10% less than the runup price (some buyers are waiting for home prices to decline 20% - seriously - 20% - they're gonna need a chair).  As well, if they work with us to get a seller rate buydown, they'll get a 3.5% rate and refinance it to a fixed 4% or so loan in a few years.  Those who predict such things say that interest rates will remain in the fours for some time.  Not bad news overall - the historic 30-year mortgage is about 5.5% so they will still be getting a good rate when the time comes to do the refi.  Keep in mind that a refi can cost as much as 2% - 5% of the principal on the loan so be sure and compare that with the savings in interest on the loan buydown.  Still, all that is better than waiting - as mortgage interest subsides, more buyers will move into the market and increase demand - which leads to higher prices.  If that raises prices 10% over the next 3 years, that 2% - 5% cost of the refi seems very small.

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