Fall 2022 Rhode Island Market Update
Real estate markets can turn on a dime. We all saw that firsthand over the past two years. The pandemic brought about a feeding frenzy in the housing market, seemingly overnight. We were already in a strong sellers market due to low inventory in early 2020 but the pandemic took it to a whole other level, the likes of which no one was ready for or had predicted. I had clients whose property value increased by as much as 40% in one year! On average, there was a 20% increase year over year. When you look at historical data, annual appreciation for real estate hovers around 3-5% so that is a significant amount in just one year!
Mortgage interest rates drive buyer demand & housing supply (inventory) drives housing prices. Millennial's account for 43% of buyers (estimated at 80 Million) and they are not going to stop buying homes. However, with interest rates in the mid 7%, and potentially hitting 8%, buyer demand has slowed--some buyers are priced out until rates (hopefully) go lower, some have chosen to wait for rates to go down---I think this is potentially a big mistake as I don't believe that prices are going to significantly go down & there is a unique opportunity for buyers right now.
Inventory in Rhode Island has slightly ticked a bit higher but overall we still have extremely low inventory and only a 1.7 months supply as of RIAR's most recent data release. There isn't any reason to believe that inventory would increase significantly enough to tip the scales. We're not building new homes in Rhode Island (at least not enough to make much of a difference at all and new builds are primarily priced $500k+). And there's no reason to believe that a wave of foreclosures is on the horizon (more on that below).
I'm seeing the current difference in the market from two perspectives: buyers and sellers.
Buyers: with slightly more inventory comes more options. Nationally, days on market has increased 45% compared to this time last year. The "list today, sold by tomorrow" phenomena seems to be over for now & that is a relief for buyers. There also aren't as many competing offers which means buyers may have leverage for seller concessions such as repair credits, interest rate buy-downs, etc.
Sellers: see above--realistic expectations about how long it's going to take is really important. Also, sellers have had to face the reality that their price expectation may not be a reality right now. And marketing matters! At the end of the day it all comes down to price but positioning the property in the best way possible is crucial.
Let's talk some numbers & data to illustrate why I don't believe we are headed towards a significant price depreciation. I find these graphs super helpful:
The graph above represents national data. Rhode Island inventory is lower than the national data but this graph is still helpful as it's reflective of what we're seeing here in RI. The red spike is what happened in 2007-2010. The drastic influx of available properties is what caused such a steep decline in property values.
The graph above uses Mortgage Credit Availability Index (MCAI) data from the Mortgage Bankers Association (MBA) to help tell this story. In that index, the higher the number, the easier it is to get a mortgage. The lower the number, the harder it is. In the latest report, the index fell by 5.4%, indicating standards are tightening.
During the lead-up to the housing crisis, it was much easier to get a home loan than it is today--I remember that from my personal experience when my ex-husband & I bought our first home. No credit check. No employment verification. As they say, if you could fog up a mirror you could get a loan back then. Back then, lending institutions took on much greater risk in both the person and the mortgage products offered. That led to mass defaults, foreclosures, and, as a result falling prices. Today, things are different, and purchasers face much higher standards from mortgage companies.
Another difference is the number of homeowners that were facing foreclosure after the housing bubble burst. Foreclosure activity has been lower since the crash, largely because buyers today are more qualified and less likely to default on their loans. The graph above uses data from ATTOM Data Solutions to help paint the picture of how different things are this time.
Additionally, homeowners today have options they just didn’t have in the housing crisis when so many people owed more on their mortgages than their homes were worth. Today, many homeowners are equity rich. That equity comes, in large part, from the way home prices have appreciated over time. For those facing challenges today, many have the option to use their equity to sell their house and avoid the foreclosure process.
The median sale price for single family homes in Rhode Island, right now, is $416k. If the market had continued in the manner that it has the past two years we would have hit $499k sometime in 2023. With the way the market is currently moving I predict we will be around $425-430k this time next year. We'll see what happens....
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