December 2, 2022

Wells: As interest rates get headlines, opportunity emerges

The big real estate story of the year is about interest rates and their rapid historical rise in 2022.  Interest rates started the year around 3.22% for a 30-year fixed mortgage in January. By late fall, they surged over 7% (although rates have improved since early November, thanks to better-than-expected inflation data). 

The surge marked the fastest mortgage rate increase on record, narrowly surpassing the 3.59 percentage-point increase in 1981. This uptick in rates cooled housing markets, as rapid price appreciation coupled with higher interest rates has slowed down buyer confidence and demand. However, three opportunities are still presenting themselves to prospective home purchasers. 

New construction window — The shifting market has created some headaches for home builders across the country, as well as Northern Colorado. Coming out of 2021, a year when builders could not keep pace with demand, they were suddenly faced with buyers who wanted out of contracts. Nationally, builders reported cancellations as high as 30%.

Many under-contract buyers could no longer stomach the prices of new prospective loan terms brought on by rapidly escalating interest rates. This saddled many builders with inventories of homes and pipelines of new builds without the necessary buyers to absorb them. Zonda Research reports the sudden increase in inventory for builders is up 44% nationally from 2019. As builders seek to offload this inventory, incentives for buyers have become commonplace, along with reductions in base prices. These incentives can be very advantageous for buyers. 

Most builders have been focusing on forward commitment financing opportunities, securing large chunks of money that can be offered to prospective buyers to guarantee lower rates. Many builders across the region have offered deals on quick move-in builds (inventory homes). Builders will offer rates as low as 4% on a 30-year fixed mortgage to a buyer as a means to help clean out their inventory. These incentives, along with price reductions, can work to a buyer’s favor and should be considered. But it’s a window of opportunity that will not be open for long, as many national builders are working to meet their annual financial projections by offloading properties at great deals to buyers. 

iBuyer liquidations — During the expansionary economy a new business model took shape. Known as iBuyers, large corporate firms were giving instant cash offers to interested home sellers. These national firms such as Zillow, Redfin, Offerpad and Opendoor — to name a few — were put in place to disrupt the traditional home selling process. The promise was to make the selling process more efficient and predictable. 

As real estate markets have proven over the years, however, they are very dynamic and prove difficult for an algorithm to predict.  Zillow made headlines in 2021 by closing down its iBuying operation after reporting major financial losses totaling $422 million in Q3 2021. In the third quarter of 2022, Opendoor — the largest iBuying operation — just reported net losses of $928 million for the quarter. On average, Opendoor is losing $39,000 on every property it purchased and is now attempting to resell on the open market. This has forced Opendoor to quickly liquidate inventory and represents an opportunity for home buyers. 

These properties can be identified by using a reputable Realtor who can help to find these opportunities. While Opendoor has not had a major presence in Northern Colorado, with less than 0.5% market share of local home sales, there are certainly many properties Opendoor has continued to market at steep discounts with lots of room for negotiation. This is a pathway anywhere in the country for a buyer to find some great deals. But the window of opportunity will be short lived. 

Stagnating inventory — If you walk into the doughnut shop, the expectation is that you will get that hot, fresh, out-of-the-oven doughnut. But by the end of the day, the once-hot doughnut sits stale on the shelf. And the only way to get it in the hands of a consumer is to offer a steep discount. Even if doughnuts aren’t your thing, the analogy holds true when looking at real estate inventory. A property can become stigmatized in the eyes of a buyer if it sits too long on the shelf. 

Typically, stagnating inventory is not a product of a bad home, but more often is due to a non-realistic pricing strategy. When a seller’s perception of the market does not align with market reality, often we find that a property will sit on the market. Would-be buyers have moved on, with a perception that something must be wrong if every other buyer has skipped over it. In a shifting market, this represents a great opportunity for buyers.

Brandon Wells is president of The Group Inc. Real Estate, founded in Fort Collins in 1976 with six locations in Northern Colorado. He can be reached at bwells@thegroupinc.com or 970-430-6463.

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