No Sellers, No Buyers

A new construction a couple of blocks away from me has been listed on Zillow for 213 days. The house is beautiful. The only thing wrong with it is when it was listed. This home would have sold for asking or above if it had been built twelve months earlier.

The mortgage market has had a heck of a transformation over the past year. From 2014 through 2021, the average 30-year mortgage was 3.8%. It recently hit 7%.

Like every other market in the world, real estate has a large psychological component. But unlike liquid markets where Animal Spirits can dominate, primary residences are more governed by arithmetic than almost anything else. The prices are what they are, and you can either pay for the mortgage or you cannot.

With interest rates up so much, you would think that prices would come down to meet buyers at a number they can afford. That hasn’t happened yet. The median listing price is still up 6% year-over year.

Instead, sellers are just staying put. New listings through for January through March are down significantly from where they were over the past couple of years.

Inventory has had an epic collapse from its high, but there are some signs it may be bottoming. This chart from Bill McBride via Altos shows that inventory is up 0.2% week over week.

I’m on Zillow regularly, and I can tell you that activity in my neighborhood is bone dry. Only ten homes are listed, and for context, there are over 10,000 where I live. Four of the ten homes available were listed in the last two weeks. I know there’s seasonality stuff here, but still, it’s a start. But consistent with the second chart in this post, prices are still way too high. That new listing is gonna cost somebody an extra ~$1,500 a month for the mortgage, or $18,000 a year. Sellers are anchored to 2021, and buyers are anchored to their checking accounts.

Unless rates come down, we’re not going to see activity pick up until sellers wake up to the fact that the environment is fundamentally different. You can drive a truck through the bid-ask spread, and it may stay this way longer than people think. Sellers have the upper hand as long as they don’t need to move. For now, they’re waiting for buyers to come to them.