What happens next is a… coin flip.

What’s going on in the market?

Think about the real estate market this way, You flip a coin into the air and if it lands on heads the market is going to drop off and prices are going to come down. Great news for buyers. If it lands on tails the market is going to take off and prices are going to start climbing again. Great news for sellers.

With me here?

Right now the coin has been flipped and it’s in the air spinning, turning, round and round… where it’s going to land is yet to be determined.

Are there clues as to how the coin lands or is it simply chance?

Great question. Here’s how things are set up right now. The “heads” camp (Buyers) is betting on the fact that prices have jumped so much since Covid that prices are at record highs and have become virtually unaffordable which will force prices down. They are not wrong.

Home Prices in the Destin area have jumped from $670,000 in April of 2020 (Covid Start) to $1,500,000 April of 2022 just two years later.

Have Condo Prices Jumped too?

Condo Prices have also jumped going from $320,000 in July of 2019 to $625,000 – almost doubling in three and a half years.

Based on what we are seeing it looks like home prices are correcting at a fairly significant rate (20%+ since they peaked in April of this year. The question is did condos just hit their peak here in November? We will be watching that closely.

Mortgage Rates

The “heads camp” (Buyers) would also say that mortgage rates have increased so much and so fast that the prices sellers are asking are no longer viable. They are not wrong.

The 30 Year Fixed Rate Mortgage Average has gone from 2.65% in January of 2021 to 7.08% in July of 2022. The last time they were that high was in July of 2001 – 21 years ago. They have settled back down a bit, falling to 6.49% on Dec 1.

Here is what some “Industry Experts” are saying about mortgage rates heading into 2023.

Zillow Senior Economist Jeff Tucker: “If inflation convincingly cools down, and the Fed subsequently stops tightening monetary policy, we could see rates begin to ease back down. The best bet is that we continue to see mortgage rates in the ballpark of current levels, perhaps from 6.5% to 7.5%.”
Mortgage Bankers Association (MBA): An average of 5.5% at the end of 2022 and 5.4% at the end of 2023. “We expect significant volatility in rates in the near term due to quantitative tightening by the Fed and other central banks, and as markets grapple with significant geopolitical, economic and monetary policy uncertainties.”
National Association of Realtors (NAR) Chief Economist Lawrence Yun: “The new normal for mortgage rates looks to be near 7% for the 30-year fixed rate. A better rate of 6% will be available to those willing to go with a five-year ARM.”
Freddie Mac: Forecasts rates dropping from an average of 6.8% in the fourth quarter of 2022 to 6.2% in the fourth quarter of 2023.

Inflation

Another tentpole the “heads camp” (Buyers) is pointing to is inflation. Prices for everything have jumped up so much that folks no longer can afford to buy things like second homes, or take long vacations at the beach, to the same level they did during and just after the pandemic. Folks just don’t have as much money to spend. Again, they are not wrong.

Transactions are down

These are massive issues that are impacting the ability of buyers to pay the price sellers want to get for their houses and condos here at the beach… no doubt. And because of it buyers are not buying. Here on the Emerald Coast the number of homes sold is off dramatically dropping from 262 in March to 97 in November. Since July we have seen a significant drop across the board.

What about condos?

Condo sales in our area are also down significantly since July. It’s almost a tale of two different years.

Where do we go from here?

Well heck, based on this prices are surely going to start dropping. Right? Maybe. Let’s take a look at what the “Tails Camp” (Sellers) is hanging their hats on.

It’s about supply, baby!

For prices to fall out in an even more meaningful way there needs to be a reasonable supply of lower priced alternatives for buyers to choose from. Right now that supply does not exist. The number of new homes listed for sale in the Destin Area has dropped from 392 in June to only 154 in November.

Is the number of new condo listings down too?

The number of new condo listings has dropped from 334 in March to 165 in November as well. Folks are taking their properties off the market rather than sell at today’s prices. At least for now.

Okay, so are prices going to collapse?

Here’s my take on the market – based on the information we have right now. For prices to go down in any meaningful way there needs to be a reasonable supply of lower priced alternatives for buyers to choose from and right now that supply does not exist. Until it does buyers and sellers will be engaged in a stare down. Who blinks will determine which way the market goes… and when.

Right now… mortgage rates, inflation and affordability are all big issues on the Heads (Buyers) side of the coin. On the other side of the coin (Tails) are sellers who are flush with cash from several big rent capture years, low carrying costs because of record low mortgage rates, and massive equity positions the result of massive price appreciation over the last few years. Bottom Line? Both side are right… or at least… not wrong. The coin is still in the air… still spinning.

My Prediction?

All prices will soften some (10 – 15%) but some folks will be forced to sell cheap and that will likely drag certain pockets of prices down dramatically more causing the stats to show an overall deeper drop (30 – 40%) through 2023. You will need to watch neighborhood to neighborhood and building to building for more accurate numbers. The number of transactions will drop (30 – 40%) as the market figures things out and toward the end of 2023, maybe mid 2024, the coin will land on tails (the Seller’s side). Why? Because time always favors the seller and the lack of supply and a new buying frenzy kicks in and pent up demand drives prices to the moon.

Or not.

Our Advice?

If you are a long term investor (not a flipper or someone at the end of their ownership cycle) you can afford to ride out this market. You may even want to get ready to add a property if prices drop far enough.

If you are a short term owner and looking at selling in the next couple of years you may want to sell now while we know prices are pretty high. We saw back in the last downturn that when prices dropped they dropped fast, they dropped deep, and they took a long time to get back. I don’t know how far prices will correct this time, or how deep the correction will be, or how long it will take to get back to the high prices again, but it could be a while. Be careful.

If you are a buyer and plan on holding it for a long time, then go after the best deal you can get, max out your rental income, and ride the market until the time is right to sell and reinvest or cash out. After the Great Recession it took 17 years for prices to get back to the 2005 highs again but… but… if owners invested in 05, and collected an average of $15,000 in annual positive cash flow per year, they would have collected $255,000 in rental income and had someone else (renters) pay off 17 years worth of mortgage cost. Not to mention, tax write offs, deprecation and many cash out refinance opportunities. All pretty good options.

If you are buying to flip and grab quick cash… be very careful.

Bottom Line

We are wealth builders, so our goal (whether you are buying or selling) is to build or protect your wealth – based on your financial goals and the current market conditions. Call us today and lets talk about how you can max out your position as a buyer, a seller or as an owner to continue building your family’s wealth well into the future.

Committed to your success,

John Moran – CEO The Smart Beach Investor | Keller Williams Realty AT THE BEACH TEAM

Keller Williams Realty – For Your Place at the Beach