It seems that every few days I get a question wondering how real estate is in our market and beyond – and for good reason if you pay any attention to the latest headlines. As we are entering the beginning of our traditional spring market here in the Upper Midwest, now is a perfect time to address these questions and prepare anyone considering buying and selling for the year ahead. You may recall my assessment of 2022 and predictions for the coming year back in December (if you don’t I suggest you read it HERE to get caught up). I’ll address what the statistics are showing since then as well as what strategies will be important for buyers and sellers during this current year.
In December I shared that the average home sale was $404,935 – using the same criteria for data through February 2023 (Twin Cities Region, previously owned homes, single family and townhouse/condo) we can see that number currently sits at $377,842 ( see graph below). This is down roughly 6.5% from the December data and 14% from 2022’s peak average value of $440,000. On the flip side, when comparing February of 2022 to February of 2023, there is virtually NO PRICE DIFFERENCE. To put that in perspective, the February average for the same criteria shows an average sale price of $376,443 (February 2022) and $377,842 (February 2023). Our market is basically flat for the past year – but anyone who bought in July of last year would beg to differ with that claim as their house is likely worth about 50,000 less.
A Dose of Reality
Let’s face it, for many those are sobering numbers but there is a bright side to it that it represents the prospect of better affordability for buyers on the horizon (something I will address later on in this post). The Federal Reserve System (aka “The Fed”) Chaired by Jerome Powell has been attempting to battle rising inflation since last spring, and the fight continues. Housing costs are considered in the monthly Consumer Price Index (CPI), and represent roughy one third of the market basket used by the Burea of Labor Statistics. For this reason, the Fed is concerned by the rise in housing costs and the impact on inflation. The result is that the efforts to curb these costs in the form of raising the Federal Funds Rate. This, in turn, impacts the prime rate and to some degree the prevailing rate of the most common home-buying product in the form of the 30 year fixed rate mortgage.
The result has been downward pressure on home prices. We can see this in the graph above since the drop immediately following the peak in June of 2022 is a direct result of the large increases in May by the Fed. As of March 2023, the fed has signaled they are still on the tactic of raising interest rates in an effort to bring inflation back in line with a more typical number closer to 3% annually. For comparison, the BLS reported that inflation in February sat at 6.4%. Take particular note that the rise of .5% month over month was attributed to “shelter increases.” The term “Shelter” refers to costs related to housing such as rent and mortgage payments. If you’re a renter, I don’t need to tell you that your rent is probably higher too!
While all of this matters, it’s national and not local in nature so it cannot capture the entire experience of buying and selling in Minnesota and Western Wisconsin (and other areas more local to us). Before we move on to our market though, the takeaway is that this current period will continue for the near future. Most likely some of these forces look to ease by the end of 2023 nationally when considering the views of various economists    though the takeaway should be that the price growth and robust seller’s market of the past 2-3 years is over. This means a shift in strategies for both buyers and sellers in the coming months.
Seller Strategies for 2023
The early showing for this real estate season is that statistics like days on market and average sales price point to longer days on market for listed homes (a survey of ACTIVE, PENDING or CLOSED NorthstarMLS listings on March 9th, 2023 shows an average days on market of 34 and median of 13). When compared to February numbers, we see an increase from 25 and 11 respectively. In practice, however, there are still a good amount of homes listed receiving multiple offers at various price points. The key to meeting your goals for selling in 2023 for a seller then rests on a few key ideas.
- Set a realistic price based on market analysis, and err on the side of conservative pricing. Many buyers are willing to bid up a property that meets their needs, but gone are the days of dozens of competing offers on the same home. Properly priced homes will be in demand, and over priced homes will languish on the market only to be bid down and beaten up. The flip side of this is that “hope is not a strategy” and pricing out of line with the market to the low side is no guarantee of low offers. The emphasis on realistic pricing (guided by Comparative Market Analysis) is critical to minimizing time and maximizing revenue from a sale.
- Repair and improve your home effectively. Sellers should plan to cure deficiencies and anticipate issues that could arise in the sales process. Money spent on improvements should be prioritized and used to the best effect; an old or poorly functioning furnace should be corrected before sale and likewise tired finishes such as worn carpet, dingy walls and other surfaces will really benefit from a refresh. What items are best depends on your case specifically, but the best improvments will help saleability (shorten time on market and entice more strong offers) more readily than they will add to your bottom line.
- Follow a numbers based approach to selling. Our market (and many others in the US) are still experiencing the shift and following the prevailing trends of days on market, number of showings to an accepted offer, and paying close attention to other homes in your proposed price point are critical to making the most of your time on the market and exposing to the greatest number of potential buyers.
If you are considering selling, also pay attention to the next section as shrewd buyers and good agents will take the time to counsel their buyers to make their money work for them. Buyers are likely to be less forgiving of defects that they would have overlooked a year ago; the higher interest rates having impacted the amount of money they may have available to make repairs.
Buyer Strategies for 2023
Many of the factors that led to the growth in prices over the past few years still exist (most notably low inventory), but higher interest rates have tempered that now. While many of the strategies I use for successful buyers differ from one to the next, here are a few that will serve all buyers in the coming year.
- Set realistic expectations – this is true in any market, but especially now as a buyer because sticking to your budget or having a slightly conservative approach in your home search can allow you to stretch if something looks real interesting to you.
- Take advantage of homes spending more time on market. The pace of buying has slowed a bit which means less stress as buyer in general. Some sellers are still reluctant to come to terms with the new market and may think they can get the same price their neighbor got last year. While some neighborhoods and area are holding value, homes that came out overpriced and were slow to adapt to the market may get overlooked by other buyers. Expect the option to negotiate on properties.
- Make your money work for you. We’ll see a return of seller-paid contributions again this year to help with downpayment assistance as well as help cure defects that sellers may have been unable/unwilling to make prior to listing. This can be especially helpful for some buyers with smaller downpayments and can help bolster your account for the inevitable expenses of homeownership too.
- The interest rate is likely not permanent. It’s true that homeowners with a 3% mortgage are more likely to stay put, but most people move based on real-world needs and not interest rate trends. The silver lining for a buyer in 2023 is that interest rates will most likely go down in the future and refinancing at a lower rate and monthly payment is well within your reach. Home prices on the other hand are projected to begin an upward trend again in the next year and in the long term, the benefits of buying today rather than waiting (as long as you can afford it) far outweigh hoping for a future market to be more favorable.
Many homeowners enjoyed seeing their homes go way up in value over the past 2-3 years. For many, the current reset in pricing does not erase all of those gains and should help reintroduce affordability for buyers in the long run. The Fed will continue to apply downward pressure in the form of interest rates until they determine that inflation has been reined in. Other markets that saw massive booms will likely bear an out-sized portion of declines. I anticipate that our market will stabilize during the second quarter of 2023 and a new pricing will be fully realized as people sell homes in the months of April to June. If you purchased since 2020, it most likely will be after 2024 that selling to move up in home class will once again be beneficial for you. Demographic shifts will continue to bring houses on the market in small numbers but we are likely to see a change in inventory in the coming years as members of the baby boom downsize and move to homes that better match their needs.
It’s easy to presume in real estate that we sell homes, but it’s people and their unique needs that are central to what I do. I’ve found success for buyers and sellers in all types of markets, and this year will be no exception. If you or someone you know is considering buying or selling in 2023 or beyond, I encourage you to give me a call because it’s only through education and understanding the market that you can take the worry out of buying and selling.