Where have all… the buyers gone?

If you work with home sellers, the pandemic has been good to you… VERY good to you. If you mostly work with buyers, the pandemic has been sheer hell for you. All of that may change in 2021.   If you spend 5 minutes reading what I am writing, you will be able to explain this dramatic shift in the market and better serve your clients. More importantly, you will be able to weed out the serious buyers and sellers from the lookers.

Legions of buyers, powered by mortgages with rates which start with the digit 2, have been bidding up homes WELL over asking price. List a property on Wednesday, schedule showings for Friday, Saturday, and Sunday, present a dozen offers on Monday, send out a “highest and best” counter to a half-dozen that night, and open escrow on Tuesday with a high-down payment offer, waiving the appraisal contingency and closing in 21 days.

Mortgage rates skyrocketed over half of a percentage point these past two weeks. The reasons were apparent but, as always, what Wall Street knew in January, Main Street didn’t discover until Valentine’s Day.

It started right after Christmas. The country went through a tumultuous election and was finally accepting the idea of a new President. The holiday season came and everyone was basking in the glow that 2021 HAD to be better than 2020. Few people realized that just 10 days after Christmas, there would be a Special Election for the two Senate seats in the State of Georgia. Those Senate seats, should they flip parties, would throw the balance of power in the Senate to the SAME political party as the newly elected President and Speaker of the House of Representatives– one political party would have TOTAL control over the US Government.

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Forget which party you support and understand this–when either Republicans or Democrats have TOTAL control of the Federal Government, spending skyrockets. When we have “divided government”, the minority party has a lever to stop the profligate spending of the majority party. Wall Street LOVES divided government because they know that it will be tricky to enact big spending plans.

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The seemingly unlikely happened in the Georgia Special Election on January 5– the Senate seats flipped and one party now has complete control of the Federal Government. Wall Street absolutely freaked out and volatility hit the mortgage bond market. Bond prices fell and rose every day. They didn’t start a long-term decline but you could FEEL that bond holders were looking for reasons to sell. Nonetheless, mortgage rates remained stable throughout January and even got a bit better towards the end of the month.

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You may think that mortgage rates are set by the Federal Reserve Bank– they are not. The Fed ONLY controls the “discount” rate” which has only so much influence over mortgage rates. The treasury bond market and mortgage bond market have SO much more to do with consumer mortgage rates so the only thing the Federal Reserve Bank can do, after it has reduced the discount rate to nearly nothing, is the actively buy mortgage bonds and treasury bonds– and they have been buying bonds in a HUGE way.

The Fed has created a lot of money through its easy money policies (it doesn’t really print money anymore). The best way to measure that through a thing called the Money Supply. The money supply is basically all of the cash and money in checking and savings accounts. If you look at this picture of three dollar bills, the first dollar is all of the “money” created by the Federal Reserve from 1913-2008. The second dollar is all of the money created from 2008-2019. The last (or third) dollar was created in 2020. Think about that– the amount of money “in the system” increased some 30% in 12 months.

More money is good, right? “We’re all richer” is the thought but it’s just ain’t so. There hasn’t been an increase in the goods and services produced in this country so the result of more money supply is a bunch of dollars chasing fewer goods and services– and that drives prices up, creating bidding wars for the simplest things….

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Does that sound like the real estate market in 2020? Why, yes,,, what you have experienced is EXACTLY what happens when you have a dramatic increase in the money supply– INFLATION.

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The Fed has a dual mandate now– keep inflation in check and target full employment. It has always been charged with keeping inflation under control but the full employment “task” was added within the past 20 years. The pandemic wrecked employment so The Fed has been pulling out all of its tools– and forgetting the damage over intervention may cause. So now…months later, the Fed realizes that it may have screwed up and it’s trying to put the toothpaste back into the tube.

Now What ?

This means higher mortgage rates– not necessarily next week, or next month, but mortgage rates will be higher in December than they were in January. Volatility could be normal too, We could see a conventional rate of 2.75% on Feb 15, 3.25% on March 10, 3.0% on March 30, 3.75% on May 1, and 3.25% on Memorial Day.

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It may scare your buyer clients and it SHOULD scare your seller clients. You need to understand what’s happening, be able to explain what’s happening, and reassure them that. despite this volatility, owning real estate is till a great long-term decision.We are here to help you when it come time to explain what’s happening.

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If you need help, contact me.  Debra and I work on the weekends. Just like you do.