Will Lower Rates Bring Back A “Sellers Market?” When Will A Sellers Market Return?

A Texas agent recently asked me when I think we might return to a “sellers’ market” (where demand for housing exceeds supply; 2021 was probably the strongest sellers’ market in history).

There are, of course, competing factors here, pushing the housing market in both directions, but there is one huge factor that nobody is considering (discussed below).

Here are a few factors that will impact the market in the near term.

1. Interest Rates. Lower rates spur more purchase activity almost immediately nowadays. Purchase activity is already up 23% year-over-year due to the recent rate drops. Additional drops in rates will only bring more buyers back into the market.
   

   The interest rate factor outweighs all other factors during most recessions. Recessions cause rates to drop, bringing buyers back into the market. This, in turn, props up housing prices – and that is why we’ve seen housing prices either hold steady or increase during almost every recession, except for 2008.

2. Affordability. This is the factor that the “crash bros” (the guys on social media calling for a housing crash nonstop for years). But lower rates mitigate the affordability crisis.
3. Supply of Homes. The “crash bros” love to insist we’ve overbuilt, and we may have temporarily in some Sun Belt markets. But we averaged almost 2 million new homes in the years leading up to 2008, and we’ve been closer to 1 million homes per year since 2008. In the early 1970s, we built almost 2.5 million homes per year. In 1972, the U.S. population was only 210 million, though. In 2008, we only had 304 million people. Today, we have almost 350 million people. We need more homes…
4. Demographics. The peak homebuying age is 30 to 39 now. In 2008, we had about 41 million people in that range. Today, we have about 46 million – a significant increase.
5. Immigration. The massive surge of immigration we saw during the Biden years has been shut off like a spigot. And yes, I know most of those immigrants were not homebuyers. But they did need a place to live – and that impacted the overall housing stock. So, it would seem that stopping immigration would negatively impact home prices.
6. Employment/Recessions. If recessions and unemployment rates get bad enough, the adverse impact on housing demand could offset the positive impact from lower rates. That is the dynamic that the economists and the “crash bros” focus on aggressively. But, as I mentioned above, in most recessions, the positive interest rate effect usually outweighs the adverse employment effect.
7. Inflation. This is not so much a near-term effect, but a permanent effect. The “crash bros” need to remember that it was inflation (an increase in the money supply) that pushed up housing prices as much as it was low rates, excess demand, work-from-home policies, and everything else. So, unless there is outright deflation, it is unlikely home prices will crash significantly (although they could correct). More importantly – “THERE IS NO STOPPING THIS TRAIN” (Lyn Alden’s famous comment about government spending and money-printing). The government’s only way out of our debt nightmare is printing money/inflation. So, housing will rise again no matter what. Young people need to buy homes as an inflation hedge.
8. Foreclosures. We won’t see foreclosures swamping the market like we saw after 2008 simply because lending and underwriting guidelines have become so much stricter. And yes, I am accounting for all of the weak FHA loans out there. There were far more insanely weak subprime loans (0% down, no income verified, poor credit) than there are weak (high debt ratios, poor credit) FHA loans today.
9. PENT UP DEMAND. This is the factor that nobody (especially the “crash bros”) is (are) considering. Mortgage rate lockdowns (where homeowners with rates under 4% don’t want to move and give up their mortgage) have been keeping people in their homes for several years now. Mortgage lenders, however, are seeing an enormous number of these younger borrowers come back into the market, as they need and want larger or different homes and are willing to give up their 3.25% rates. This is particularly the case when rates drop even a little.If Mom is working from home out of a 3-bedroom house with two kids around, I bet she’ll be willing to give up 3.25%. Similarly, if Dad was working from home but now has to go back to his office in a city that is 90 minutes away on a good day, I suspect he, too, will give up 3.25%.

So, no, I don’t see a crash coming, but yes, I can see some markets continuing to correct. But I also won’t be surprised at all to see rates drop another 1/2% to 1%, resulting in a housing resurgence.