The Market’s Cooling

The boom came on so fast and so strong this year that it was scary. Buyers this spring were like a bear that had hibernated for six years and finally woke up famished, eating everything in sight. Prices shot up at unsustainable rates.

Median Price per Square Foot

That has begun to change. In the last 60 days, mortgage rates jumped from 3.4% to 4.5%. By the end of June, prices had risen 18.7% over last year, which really can’t happen two years in a row. Rising prices and rising rates combined to increase the mortgage payment for a home by 33%.

Interest Rate Graph

And this has now given buyers a moment of pause. The market may keep rising but it will be at a more modest pace than we saw this spring; in some places prices will go up and down this winter.

The number of homes for sale has been increasing since April, which is also when bidding wars began to ease. Over the last seven days, the number of Redfin customers signing offers has declined by 25% from the average weekly rate in June. At the same time, 9% more people contacted us for the first time, so the changing market is still drawing buyers into the market, not just scaring them away.

Tales of Joy and Woe

How fast has the market shifted in buyers favor? Well here are a few examples:

  • In Washington DC, listing agents at other brokerages called last week to sayour agents forgot to include an escalator clause in the offer, promising more money in a bidding war. We said no, we didn’t forget: this is our final offer.
  • In LA, Redfin agent John Venti won three straight offers last weekend with no counter-offers or competition. “That hasn’t happened,” he said, “since December 2011.”

But not everything has changed. Almost 70% of sales are still a bidding war.

  • In Boston, when Redfin agent Sandy Rosen lost out on a bidding war for a $600,000 Sudbury home, we stayed in touch with the listing agent. After negotiations over repairs stalled, the listing agent called us back and we snatched the deal away from the initial buyer.
  • In the Bay Area, where homes are selling for hundreds of thousands above the asking price, we’ve been winning deals not with the highest bid, but by promising the seller we’ve got enough cash to make up for any shortfall in the appraisal. Redfin’s Jess Williams just beat out 28 other offers using this tactic on a $700,000 San Francisco listing.

The Return to Normalcy

Are we worried that the market is cooling? No. We were worried back in April, whenwe warned against a frothy market:

And there’s one change that is about to come: rates will rise. In our survey of 1,100 home-buyers, 58% cited “low interest rates” as a primary reason for buying now, but mortgage bankers now expect rates to rise from 3.5% to 4.5% over the next year. When that happens, the frothiest markets could be in for a setback.

Buyers are still out in force, with inventory down 19% from last year, rates still 2 points below historical norms, and prices 26% south of their 2006 peak.

What has happened after six years of depression, and six months of manic bubbliness, is that we have returned at last to a normal market: you’ll pay more now than you would have at the absolute bottom in late 2012, but there will be more — and better — homes to choose from, and a better chance of buying one.

That sounds like a good deal to us. What’s your take on the market? Just leave a comment on our blog or on Facebook.

Best, Glenn

Glenn Kelman | CEO, Redfin

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