“The real estate market is crashing!” — is what you see in headlines everywhere.
Sales are down 38.8% year-over-year. Prices are down 9% month-to-month. The number of homes for sale is up 26% compared to last year.
What buyers have long been waiting for has come: more listings, less competition, and… gasp… lower prices.
So why aren’t more buyers… buying?
In spite of the month-over-month price drop, the average real estate price in the Greater Toronto Area are actually up 9.4% compared to last year.
Sales… while lower than a ‘record breaking’ year in real estate… are actually happening.
People need a place to live. And whether they buy now — when there are many opportunities to negotiate a lower purchase price — or wait until competition picks up again (and bidding wars along with it) is the big question.
You’d like to think logic defines the real estate purchase. On the contrary. Buyers are driven by emotion. Sellers — greed (and greed is good, according to Gordon Gekko in the movie Wall Street).
Here’s the proof. FOMO vs. FOOP.
Not so long ago, before the peak of real estate prices in February 2022, buyers saw the number of homes for sale declining. They witnessed prices surging. And they heard about the intense bidding wars happening all throughout the Greater Toronto Area — even in its furthest reaches… and even in further unheard of places beyond that.
In comes FOMO — the fear of missing out.
Buyers thought — what if I don’t find another home quite like the one I just saw… and lost out on?
What if prices keep going up like this… at such an intense pace… forever… and ever?
What if I stay stuck in my current house… and never afford my forever home?
What if I can never leave my parent’s basement… or this rented apartment?
So they jumped right in. They competed against other voracious, house hungry buyers. They slapped their offers down on the table (digitally, of course). Along with it, their bank draft (or wire transfer) deposits.
They lost. They lost many times. And then… they eventually won… at a gajillion dollars over the asking price.
Exaggerating aside — buyers drove prices up. Yes, you read that correctly. Buyers drove the prices up.
Buyers who felt like they were going to miss out on the prime real estate ownership opportunity of 2020… 2021… and into early 2022.
Homeowners can’t be blamed for the shortage of inventory. The government? Maybe… but I’m not going to get into politics.
Buyers drove home prices up.
They yearned for more houses — which didn’t come.
They shouted out for help — to put a brake on the rapid increase of prices.
And then, as FOMO reached it peak in February 2022, something significant happened.
Interest rates started going up.
And as of the date of this article — rates have continued to climb and the government’s key rate currently sits at 1.5%.
I said this before, and I’ll reiterate, that prices didn’t go down necessarily because of the interest rate. (You could argue with me there.). But rather the real estate buyer’s perception of what an increase in interest rates mean.
Here’s the proof.
If buyers kept buying, and the housing inventory remained tight, price growth would have slowed, but they would not have dropped at the rate you’re seeing happen. It’s basic supply and demand. Steady demand with decreasing supply would still contribute to price growth, though not as aggressively as we’ve seen in the past year.
But buyers were taken aback by simultaneous occurrences outside of their control. The war in Ukraine. The worldwide pandemic since 2020. Money printing. Inflation and the ever increasing costs of living. Now add rising interest rates to that, and you have the perfect storm for a real estate ‘crash’.
Prices started to dip. Sellers, hearing about how they may have missed the best opportunity to sell their home (which, by the way, I wrote about back in January 2022 (pats myself on the back)), started to list their home on the market.
More sellers listed, inventory grew, and buyers… didn’t buy.
What buyers prayed for — more listings, more listings… more listings! — actually happened… and what did they do?
They chose to sit on the sidelines… and wait.
Not all buyers sat and waited. Buyers who are transacting right now either got a great deal… or overpaid and are facing their next challenge — not being able to close their purchase.
Generally, majority of the buyers (who lost out in the 100-or-more buyer multiple offers) are now sitting… and waiting.
They reached another level of buyer emotion: FOOP.
As prices decline and as inventory increases — and as the media puts on a great show about how the real estate market is crashing — buyers have developed FOOP — the fear of over paying.
What if I pay too much, and another home like the one I like sells for 10% less next month?
What if I buy a house and the appraisal comes in $100k or $200k lower than my purchase price? (Which is happening, by the way.)
What happens if interest rates keep rising and I can’t afford my mortgage anymore?
Welcome to the FOOP era of real estate sales, which started in March 2022.
Prices will continue to decline, until one or more of several things happen:
- Interest rates stop rising and start dropping again (we won’t see this for a while)
- The number of homes for sale starts decreasing
- The rate of inflation drops (and buyers gain confidence about everything again)
- The government introduces a program to help buyers (too late for that now)
- General confidence about everything (economy, world, life) goes up again
Real estate is cyclical. There are more up years than down years. And prices will go back up again. It’s been proven in the past, and will be proven true again soon.
How soon is the question — a few months from now? A year from now? Five years from now?
As a homebuyer, realize that real estate is inflationary. The cost of building a house in the future will be more than it is today… and the cost of building a house today is more than what it cost 20 years ago. This is one of the primary reasons real estate will ‘always’ go up… unless something truly catastrophic happens in the world.
Don’t look at buying real estate in a short term time window. Think about how much your property will be worth five years from now… ten years from now.
Focus instead on affordability, and being financially secure.
Don’t take on too much house — more than you can afford.
Reduce or eliminate as much debt as possible, since borrowing money is going to cost you a lot more interest in the foreseeable future.
Understand that you’re witnessing a great buying opportunity unfold right before your eyes.
And if you think prices might drop another 5%, or 10%, why don’t you negotiate this and offer a lower price to a home seller? You might just get the best deal right now.
Sellers — if you’re not motivated to sell, and if you can’t accept the price reality of today’s market, do yourself a favour: take your listing off the market.
Stop wasting time on showings. Stop staying up at night thinking about whether or not you’ll get a February 2022 selling price (you won’t).
Take your house off the market, and start living again. It is almost summertime, after all.
And here’s advice for everyone: stop looking at real estate as if it’s the stock market. So many websites and apps today give you the ability see how much your neighbour’s home sells for. Guess what — you don’t gain (or lose) money until you actually sell.
Enjoy the house you live in. Hold it for the long term.
We will see prices go back up again. It’s just a matter of time.
📸 Nik Shuliahin on Unsplash
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