Many, many years ago, when I was a loan officer, I used to take one of those “Magic 8-Balls” with me to Realtor presentations. Invariably, someone would ask me what rates were going to do and I would take the Magic 8-Ball out, shake it and repeat the answer. Of course, it would say something like “concentrate and ask again.” Everyone would get a laugh and we would move on.
The point is—we can’t predict the future. But the question is always an opportunity to demonstrate your expertise as you explain why you can’t answer the question. I would always follow with factors that influence interest rates and how these factors can’t be predicted and nor can the future of interest rates. I would let them know what factors could push them higher and what factors might cause them to go down or even stay the same.
At the end, someone would remark that I sounded like a politician—a lot of words without any conviction. Another laugh. Of course, now they are talking about home prices. But the same concepts apply. The question is: what are the factors which may affect home prices? Again without coming to any conclusion other than not predicting anything.
One could just say “supply and demand,” but that answer is too generic. The factors at play in this market include demographics. We have not built enough homes in the past decade to accommodate our growth rate of household formation. These demographics are supporting house prices.
Another factor is affordability. The rise of home prices and higher interest rates have outstripped income growth. That means that homes are less affordable. This factor would lessen demand, causing prices to fall. However, because rents are also rising, the alternative to owning is looking less attractive as well, limiting this factor.
To make things more complex, high rates are discouraging owners from listing their homes, as many of them are sitting on low-rate mortgages. Thus, affordability is down, but so is the available inventory.
When you have multiple strong factors influencing prices in different directions, it is likely that the market will be more stable. It may appear that prices are coming down because buyers are not bidding them over list price, but that is indicative of a more normal market. Again, we can’t predict the future. What if a recession hits and interest rates fall? Then, we would be introducing additional factors.