Now that spring has arrived, and snowflakes have been replaced by raindrops, the Des Moines real estate market is well underway. With three months into 2018 and the official start of spring, it feels like a hot market and there is no doubt that buyer activity is brisk. However, there are a few differences when compared to the last couple of years.
2017 Was All About Home Inventory
Ever since 2009, the number of homes for sale has been on a steady decline. 2018 is bucking that trend with a welcomed rise in home inventory for buyers to choose from. But the increase is not from more homes being added to the market. In fact, fewer homes have been added to the Des Moines MLS since January 1st when compared to the same period a year ago. So where is this rise in inventory coming from?
It’s actually a combination of a couple of factors. A slower start to home buyers hitting the streets so far in 2018 and an increase yet again in new construction inventory. Of the 3,072 homes for sale on March 25th, 1,344 of them were new construction.
That’s almost 44% of all homes for sale (up from 41% a year ago). And when you factor the median list price of new construction at $309,900 compared to resale at $179,900, that’s a $130,000 gap.
Traditionally first-time home buyers come out first and the general activity is in the lower price ranges. As homes begin to sell, sellers having sold their home can now begin their home search, typically in a higher price range than they currently own. As they become home buyers, they begin to chip away at the next price point of homes for sale and the process continues until the market hits a peak. I call this trickle up economics.
2018 Is All About the Cost of Borrowing Money
In an economy where buyer income is on the rise as it has been in the past 3 years and mortgage interest rates remain low, affordability of higher priced homes also increases. That is what we have experienced for the last 2 to 3 years.
But look at where mortgage interest rates have moved just since the first of this year.
The cost of a 30-year fixed rate mortgage has risen by nearly ½% since January 1st and this directly affects the affordability of home buyers. In fact, predictions are that this same rate will be at 5% by years end.
A qualified buyer’s purchasing power drops by $10,000 for every ½% increase in their mortgage interest rate, so a buyer in January that could afford a $200,000 home can only buy a $190,000 home at the end the March. Add to this the increase in home prices and you can see how quickly the balance can shift for buyer’s affordability.
The bottom line is that if mortgage interest rates continue to climb, either home values will begin to level off or home buyers will start sitting out and waiting for rates to come back down (which they won’t). Either way, 2018 appears to be in for a shift in the status quo.