The average home price in the Tri-County rose 2.5% in March. Portland home prices have now increased 7% over the last 2 months. Based on the truest metric to value homes, $/sq ft, home prices are almost 5% higher than they were at this point in 2023. I expect to see a minimum of another 5% increase by the end of June. I have seen some bidding wars go unusually high over asking recently. A couple houses went $50,000 over asking but they needed to be very competitively priced in areas where there is limited supply to achieve that. Most listings are not seeing bidding wars so there are still plenty of opportunities for buyers to secure properties. Some sellers definitely have an increased sense of urgency to list prior to the proposed changes in how buyer’s agents are paid. I think the uncertainty of this is driving sellers since they don’t know if the market will improve or get worse for them in the latter part of summer. Buyers are motivated to close a purchase before the rule changes in July as well since they may have to shell out more capital to purchase a home once the proposed rule changes take effect. What will happen if mortgage rates materially fall is always in the back of peoples minds as well.
The 30 year fixed rate averaged 7.1% across the United States this week. The rate of inflation is playing the largest role in dictating mortgage rates since every inflation report coming in is being overanalyzed. Investors, economists, and analysts are putting each report under a microscope trying to determine to what degree – and more importantly when – the Federal Reserve will cut rates. On April 10th, the Consumer Price Index (CPI) indicated prices rose 3.5% year over year in March. Prior to the report, the consensus number of rate cuts being priced in by the market had already fallen to just two in 2024. Following the report, the bond market is pricing in less than two rate cuts and the projected date of the first rate cut has been pushed out to September. The US economy added 303,000 jobs in March so the economy is still running hot. However, as long as inflation doesn’t further accelerate, this isn’t the worst case scenario by any means.
This is going to be an interesting year in the sense that making predictions is difficult when we have an election, rate cuts will likely be coming at some point, and changing rules around buyer’s agent compensation are coming as soon as July. I wrote extensively about the upcoming changes to how buyer’s agent commissions will be negotiated a couple weeks ago. A link to the article is here if you are curious. One insight I didn’t share, but may become relevant, is how buyers needing to hire representation could impact the local housing market. Housing market activity tends to moderately slow in late June. So what will happen if a larger than normal number of buyers take a step back in July thinking that they can’t afford a buyer’s agent? There could be a worse market for sellers coming directly as a result of changes some sellers sued for. It’s an ironic situation in that sense. At the same time, prices will continue to run upwards before we get there so there is a real cost to buyers from waiting to buy. Traditionally this time of year housing increases in cost by approximately 2% per month based on seasonality. Over the last 3 years prices have gone up between 12-14% from January through June and we are up 7% at present. In a month, it would be a pretty good guess that housing will cost 2% higher than it does today and so on. In July, if buyers hypothetically need to pay their buyer’s agent 2.5% out of pocket, it would signify an additional month of cost increases in a sense.
Another aspect of the changes in the way buyer’s agent compensation is negotiated is the impact upon a buyers ability to qualify for a loan. I have already seen instances of lenders looking to verify their clients have liquid funds to pay their agent, in addition to having their down payment, as part of the preapproval process. If a prospective buyer marginally qualifies for a loan now, they might need more capital after July. Even if your agent can negotiate their commission with the seller, you still have to be able to get a preapproval letter to make an offer in the first place. Veteran Affairs (VA) and Federal Housing Authority (FHA) borrowers in particular could be in a tough spot once the proposed changes come into effect. The VA and FHA are rushing to change their lending rules but the truth is these loan programs might not function the same way in the near future. Structural changes to the housing market might not allow it. If you have been holding off buying a home using one of these programs and intend to use a 0% down or 3.5% down payment, your window to buy with that little capital might only be open for another 70 days or so. However, conventional loans with as little as 3-5% down will still be available as long as you have good credit.
Home prices are already moving in anticipation of rates falling. When they ultimately do, we could see a market that is far harder for buyers to navigate than it is right now. Many builders dropped the amount of buyer’s agent commission they were offering in 2021 and 2022 in response to overwhelming buyer demand. I think this hints that sellers in the resale market could do the same if market conditions warranted it. This could leave buyers on the hook for at least partially paying for their own representation in any period when the market gets really hot. In the present market almost all builders are paying buyer’s agents commissions between 2.25-2.7%, so we are not presently in a market that would accept that type of behavior from sellers. Personally, I think sellers that refuse to pay buyer’s agents coming out of the gate in July are going to have immense difficulty selling their homes. Either way, what is clear is that real estate transactions are about to become a little bit more complicated. Some buyers seem to have caught onto this and are taking action. It seems logical that buyers would want to secure a home before prices increase further and any changes that would be detrimental to home buyers take effect. The intensity of certain bidding wars I have witnessed over the last few weeks suggests this is another factor that is driving home prices higher.
