The prices people expect tomorrow affect supply and demand today.
Economists say “fundamental” economic factors such as interest rates and household income determine home prices. For some reason, economists don’t believe that people’s expectations of future house prices are a fundamental factor in determining current house prices, but they should.
economists have done a lot research about this general idea. Unfortunately they call it a variety of things, which is very confusing. price expectations, price Extrapolation, biased expectations, adaptive expectations, Expectation of diagnosis, unreasonable excitement, learn from price, Momentum transactionand other names.
It goes by many different names, but the idea is clear. If you expect house prices to rise in the future, you’re obviously not willing to sell now, you’re willing to buy now, and are willing to pay more than the current market price. for home. That expectation causes house prices to rise even more rapidly, making people even more convinced that prices will continue to rise, repeating the feedback loop that prices will continue to rise. leads to
If you expect house prices to fall in the future, you will be more willing to sell, less willing to buy now, and less willing to pay for the current market price of your home, creating a negative feedback loop that will lead to lower prices. increase. .
Home buyers and sellers aren’t the only ones affected. As prices rise, lenders tend to extrapolate higher prices and higher profits into the future, which in turn causes them to ask for more money in their homes, leading to other feedbacks such as higher house prices. There is likely to be. loop.
This is the opposite of standard economic thinking. An increase in price is believed to reduce demand. Indeed, higher prices reduce demand in the long run, but if higher prices lead people to believe that prices will rise further in the near future, higher prices can increase demand in the short and medium term. There is a nature. The opposite happens when prices fall.
Perhaps that’s why economists don’t call price expectations fundamentals. In the case of housing, it is very difficult to explain why the secondary effect of price changes (the impact on future price expectations) can temporarily outweigh the textbook effect.
The point is that many people expect current price trends to continue in the future, whether prices are moving up, down or sideways, and those expectations could account for a large portion of current housing demand. It means that there is sexuality.
Mortgage rates are one of the most basic of all housing market demand drivers. If he borrows for 30 years with a small down payment, changes in mortgage interest rates will have a significant impact on his monthly payments. Over a two-year period starting in late 2018, mortgage rates fell, monthly payments fell, and house prices rose. Other fundamental shifts caused by the pandemic have further stimulated demand for housing.
Interest rates stopped falling in January 2021. The stimulus check ends in early 2021. The work-from-home movement was also old news back then. Nonetheless, house prices continued to soar until May 2022.
Many investors who made big bucks on rising house prices doubled down, borrowing as much money as possible to buy more homes. Many potential live-in homeowners wanted to buy before prices rose even further.
House prices continued to rise in 2021 and 2022. This is largely because people expected house prices to continue rising even though many of the underlying fundamentals were no longer bullish.
Many are just speculating on past price increases. Perhaps the herd instinct was also at work: “Everybody’s offering tens of thousands of dollars above list price, so should you!”
Then, in 2022, mortgage rates skyrocketed. The music stopped and the punch bowl was taken away. Housing prices are flat. Expectations for future price increases have started to shrink. Today, the future price projection portion of demand is much smaller than it was last spring, and will continue to decline unless prices rise.
The bottom line is that demand will continue to decline for months, regardless of mortgage rates, as people gradually lower their expectations of future home price increases. As a result, demand for housing is on a downward trend.
The Fed’s next rate hike will immediately cut demand on top of lower demand due to lower expectations of future prices.
Median home prices have already started to fall in some cities, such as Phoenix and Boise. If the price goes down long enough and enough people start expecting it to keep going down in the future, the game will change completely. It creates a new feedback loop, but this time negative feedback. Creates a loop: low prices lead to low prices.
It seems very likely that many homebuyers’ opinions will shift from last year’s “buy as soon as possible” to “wait and see”.
In addition, some potential home sellers slowly become interested in selling if the one-year valuation of their second home or rental property is no higher than what they earn from a full-time job. Some people become
Expectations of future prices, which are part of demand, will fade in maybe a year or two, maybe two or three years. Add to that a recession and a drop in demand for housing, and you’re in big trouble.
John Wake I am an independent real estate analyst.
Opinions expressed in commentary articles on Fortune.com are solely those of the authors and do not reflect the opinions or beliefs of the authors. luck.
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