You write a full price offer on a house the same day it hits the market… Your offer competes against 8 others and loses to a cash bid $30k over asking price… Six months and 9 losing-offers later, you give up.
War stories like this were not uncommon for Grand Rapids’ buyers in 2015.
There are several reasons why the Grand Rapids real estate market is so hot right now. We’ll look at some of the more interesting factors in future blog posts — things like economic growth, commercial development, and baby-boomer/millennial dynamics.
Today, however, we’re going to break down two of the most boring contributors– albeit two of the most important: Interest Rates and Inventory Levels.
The common themes for interest rates in 2015 were “Low” and “Steady”.
Fixed 30-year mortgage rates opened the year in January 2015 at 3.9%, topped out in July at 4.2%, and closed the year at 4.0% — another year of historically low borrowing levels across the country.
If you’ve turned on the news once in the last few months, you already know the Fed plans to put some upward pressure on interest rates in 2016.
According to Freddie Mac (October 2015 US Housing Outlook), rates may climb as high as 4.6% by the end of 2016.
From a macro perspective, 4.6% mortgage rates are still extremely low. Just ask anyone who bought a home in the 1980’s when rates fluctuated between 10% and 18%.
From a micro perspective, however, what does a 4.6% mortgage rate mean to the Grand Rapids home buyer in 2016? Depending on the amount of money they want to borrow, a rate hike from 4.0% to 4.6% could have a significant impact on their monthly payment.
According to the mortgage calculator from Treadstone Funding, a $200k home buyer borrowing at 4.6% instead of 4.0% would see their monthly principal & interest payment increase from $764 to $820.
That may not seem like a huge jump to some people but consider the fact that a monthly payment is the basis for how many buyers set their budget. A monthly payment is also the basis for how much money a lender will let the buyer borrow.
So does this mean that the $200k buyer from 2015 will become a $185k buyer in 2016? Maybe, maybe not. Either way, it probably won’t matter much to sellers in 2016, because thanks to extremely thin inventory levels there’s not likely to be a shortage of buyers at any price point.
One of the simplest indicators of a “hot market” or a “seller’s market” is the level of housing inventory.
Inventory levels are stated in “months of supply”, which tell us the number of months it would take to deplete the current supply of homes for sale if no new inventory was added.
Most economists agree that:
– Less than 6 months of inventory represents a seller’s market,
– Between 6-7 months of inventory represents a neutral market,
– More than 7 months of inventory represents a buyer’s market.
It’s been a seller’s market in Grand Rapids for a few years now, but 2015 pushed us even further with average inventory sliding all the way down to just 2.5 months.
Where are inventory levels heading as we move into 2016?
If we take a look at the short-term trend data below, it suggests that 2016 could be another record-low year for inventory.
Current inventory levels (2.8 months for December 2015) are quite a bit higher than they were earlier in the year (1.9 months in March). It’s normal for inventory levels to be lower in the spring and higher in the winter. However, when you look at the spring-to-winter cycle in 2014 versus 2015, you can see that inventory this winter has not replenished quite like it did last year.
From winter to spring we generally see inventory tighten down, but what happens if it’s already tight in the winter?
Looking at last year’s data, we saw a seasonal inventory slide from 4.2 months (December 2014) to 1.9 months (March 2015), representing a 55% decrease. If we get that same type of seasonal slide this year, inventory levels in March would be just 1.25 months (38 days)!
Is it possible for inventory to get that low? Yes. We know this because several “hot real estate markets” across the country are already there. Portland, for example, has less than 30 days of housing inventory right now.
To be clear, we’re not suggesting that we WILL see inventory levels approach 30 days this spring. We’re simply taking note that trend lines appear to be pointing in that direction. We’ll just have to wait and see.
We know the Grand Rapids real estate market is hot (highly competitive), and we know that we’re in a seller’s market.
We know that some upward pressure on mortgage rates in 2016 could tighten the budgets of some buyers, but that inventory levels are suggesting the market will probably not care much.
We know that, in general, a highly competitive market is going to result in homes selling for more money in less time.
Average home sale prices in 2015 surpassed $175k, an all-time high for Grand Rapids.
A simple linear forecast on the graph above would project 2016 average sale prices to reach just over $185k.
In general, it looks like 2016 is shaping up to be another great year for the Grand Rapids real estate market. It’s an exciting time to be a part of it, but make sure you find professional help before you make any major decisions.