Dallas Real Estate Market Shadow Demand and Shadow Inventory
Hey there, Dallas-Fort Worth
Here’s what we’re talking about this month
Interest Rate News (of course)
The current shadow demand for homes and the current shadow inventory and what these terms even mean.
Where do we stand with the sky-high pricing from this time last year?
And of course, the current market numbers for DFW
So let’s get to it.
Interest rate news.
When will mortgage interest rates drop?
According to the last update from Freddie Mac, the average mortgage rate for a 30-year fixed-rate mortgage is 6.79%. The Mortgage Bankers Association reported that mortgage applications were down 27% from the same week a year ago. Ouch.
We’ve been over 6% for nine months now and it’s showing in the data. Home sales are down. In DFW we’re down 5.7% in the number of sales when you look at last year and we’re currently down 12.4% in pending home sales. Pendings tell us the direction where closings will go next month.
So is there any relief in site?
A recent article by CBS news had the following predictions.
You can find the article here: https://www.cbsnews.com/news/when-will-mortgage-interest-rates-drop-what-experts-think/
In an article from TheMortgageReports.com, Danielle Hale, chief economist at Realtor.com said, “Mortgage rates could be in for a roller coaster ride in June. While down from its peak, inflation has shown significant sticking power. This means that the Fed is likely to keep short-term rates higher for longer than previously expected, and mortgage rates may see some upward pressure over the next few weeks. Lower inflation readings could alleviate that pressure, and mid-June will be the next check-in on price changes. Fortunately, markets have adjusted higher inflation expectations over the last few weeks in May, so if June’s inflation data shows relief on price growth, there will be room for mortgage rates to ease in response.”
So, to the question if there’s any relief in site, it doesn’t look like there will be from a mortgage rate perspective.
But here’s how you as a buyer or seller in this market can turn that news around. I think every market update video over the last few months has talked about this.
I’m talking about rate buy-downs. You can do 2-1 buydowns and even 3-2-1 buydowns. There are so many options to offer as a seller and to negotiate as a buyer so that you can still move in this market.
If you’re a seller who needs to move, this is a great way to get on to your next home. If you’re a buyer, this is an incredible way to buy your house at today’s price and start building your equity.
Most experts agree that as soon as rates come down, a shadow demand will come into the light and we’ll have a deluge of buyers hit the market and drive the cost of homes up even more. It will not be a fun time to be a buyer and you’ll be back to competing with multiple offers on a house and having to offer more than asking to even be in the seller’s consideration set.
And here I start with that term - shadow demand. It’s been used to describe the increasing group of buyers who are hiding in the shadows and waiting for conditions to change in their favor before they come out into the light. Another way to look at it is that we have a pool of buyers that are essentially building up behind this interest rate dam, of sorts.
Imagine this, you’ve got this pool of buyers who can’t or won’t buy a house at these interest rates but they’re ready to buy. You have some who will spill over as they get impatient. You’ll have a few more who spill over as the dam goes down with slight drops in the interest rate.
But as soon as rates go down and noticeable amount, they’ll come pouring out en masse. What no one knows for sure is how much rates have to come down for the demand to open up.
CNN reported on a new study that showed 5.5% may be the magic mortgage rate to get things moving in the market.
I heard an interesting analysis from Mike Simonsen of Altos Research. Their national models indicate we will have negative year-over-year inventory growth in mid July. He said, “Shrinking inventory year over year is generally associated with rising home prices another year out. So that actually bodes mildly bullish for home prices in 2024.”
Of course if interest rates stay high, the pent-up buyer demand could keep pooling and further compound the problem when rates go down.
So, if you are one of these shadow buyers, I cannot stress enough how getting out of the shadows now will serve you well.
I also talked about shadow inventory in the intro. In the past, shadow inventory referred to homes that were owned by banks or going through the process of foreclosure. But now it’s taking on a different meaning to simply mean housing inventory that has not yet hit the market but is primed to do so when circumstances prove beneficial.
Right now, here are the reasons people don’t want to sell:
They don’t want to lose their current mortgage rate. About 85% of homeowners have mortgage rates at 5% or below.
Remember, you can do rate buy-downs and get a great interest rate. And if you’d consider a new-build, many builders are more than happy to offer this to buyers right now on builder inventory homes.
They’re afraid we could snap into a recession any day now and don’t want to be sitting on the market when that happens.
Some would argue that our economy has been behaving as though we are in a recession. If we get that official label, could it slow things, yes, it could. And you could take your home off the market at that time. But there are always reasons people need to buy and sell real estate. With already low inventory, you could be in a prime position to sell well if this were to happen.
There’s not a lot of inventory to choose from and they’d rather wait till more homes are on the market.
It’s the same issue we had during covid when there was so little inventory. Sellers were afraid they wouldn’t have enough to choose from and they wanted to find their new home before listing their current home. I understand that objection and don’t have a great counter to it.
They want to wait to buy when prices go down.
They want to wait to sell until prices go up higher once demand comes back.
So I’ll respond to four and five at the same time and that’s to remind you that you buy in the market you sell in. So if you wait to buy for prices to go down, you’ll end up selling at a lower price. And there’s not a lot of data pointing to prices going down any time soon.
And if you wait to sell until prices go up, well, you’ll be buying at a higher price too and competing with more buyers at that point.
The beauty of buying now is that you lock in your cost of the home today. Sure, will things adjust if you do a rate buy-down? Yes, they will. But if you saw the video I did about rate buydowns, you’ll remember that you have to get qualified at today’s mortgage rate. So you’ll know going in what the ‘worst case scenario’ is and avoid surprises down the road.
And remember, you never know a market was the best market to buy or sell in until it has passed. Only hindsight can tell us the “best” markets.
Okay, let’s shift a little bit to talk about the sky-high pricing from this time last year. Where do we stand on those pricing peaks we hit last May and June?
When we look at our entire MLS, we see that last May our average sales price was $490,005. Last June our average sales price was $490,613. So while May was a close second for our sales peak, June won out by a mere $608.
When we look at May’s numbers for this year, we see that we were down 4.4% from last year and our average sales price was $468,588. However, when we look at 2021, just two years ago, the average sales price for that May was $412,732. We are up 14% from two years ago.
Now, for the rest of the market numbers, here’s how our entire MLS performed in May.
New listings went up month-over-month to 14,988 homes. We are down 12.6% from last year, though. Now typical patterns show that next month we will be down since that’s normal for our market cycle. So if you think you don’t have a lot of homes to choose from now, it’s not looking like it’s going to get any better.
The overall number of homes for sale has gone up. We currently have 24,715 homes for sale. That is a really big 33.1% jump from last year. It tells us homes are taking longer to sell.
What’s also interesting to me is that we have a lot more homes for sale at the present moment. Naturally you would think that because we have more supply, prices should go down accordingly. However, even though inventory has gone up 33.1%, our prices have only gone down 4.4%. And that’s with interest rates about 1.75% higher than they were this time last year.
This is just another indicator to me that the flood gates of buyers will open up when rates start coming back down.
The number of closed sales went up to 11,231. We are down 5.7% year over year in the number of sales.
We now have 2.6 months of inventory. That’s an increase from last month and a big increase from last year, further showing that homes are sitting longer.
The time it takes for a home to go under contract is an average of 45 days.
Our average sales price per square foot for DFW increased to $203 per SqFt. and is down 3.8% from last year.
The amount homes are selling for as a percentage of the original asking price improved last month. Homes are now selling at 97% of the original asking price. This data point has consistently improved since January, showing that sellers are having to make fewer concessions to sell.
The takeaway is that the market isn't a runaway success for sellers, but it's also not a runaway success for buyers who were hoping to get rock-bottom pricing on a home this year
Those are the numbers for May, but I’m curious to know what questions you have about this market. Let me know by commenting on this video.
And if you like being in the know about what’s happening with real estate in DFW, be sure to like and subscribe to this channel.
I’m Jennifer Shannon and I’m a Realtor and Broker Associate with Keller Williams.
If you’re thinking of buying or selling, let’s hop on a call or a zoom meeting to get started. You can reach me by phone or text at 214-803-4444 or start with an email to jshannon@kw.com.
We’re the market experts and thrive on having our pulse on the data so we can serve our clients the best. So far this year our team has closed 118 transactions worth over $47 million in volume. We know what it takes to get homes sold in this transitioning market and leverage all these lessons learned for the benefit of our clients.
So if you’re ready to get started on selling or buying your home, just reach out to me by phone or text at 214-803-4444 or by email at jshannon@kw.com. I’d love the opportunity to interview with you to earn your business.
Well Dallas Fort Worth, that’s all I have for this month’s update. I look forward to updating you next month on what’s happening in our real estate market.
Bye now!