July was an interesting month for the market. We saw another rate hike from the Fed, continued red hot inflation numbers and some steep declines in Vermont's housing activity, as shown in the graphic above, indicating that more changes are sure to come.

Fed Hikes Rates Another 75 Basis Points

As expected, the Fed hiked its benchmark Fed Funds Rate by an aggressive 75 basis points at its meeting last Wednesday. This follows the 75 basis point hike they made at their June meeting and marks only the second time the Fed has hiked by 75 basis points since 1994.

Note that the Fed Funds Rate is the interest rate for overnight borrowing for banks, and it is not the same as mortgage rates.

What’s the bottom line? Though many people worried this would mean another increase in mortgage rates, it did not - for now at least. Mortgage rates are currently sitting between 5.25 and 5.75% at the time of this update.

During his press conference, Fed Chair Jerome Powell did say that another “unusually large increase could be appropriate” at their meeting on September 20-21, depending on the data received between now and then.

 

Uncertainty Causing a Shift in the Market

While we’ve been talking about the impending shift in the market for months, July is the first month where we really saw a steep drop in market activity. Compared to June, we saw a 21.7% drop in new inventory throughout the entire state of Vermont and a 24.7% drop from July 2021. Pending home sales took a nose dive as well, decreasing by almost 13% YOY throughout the state and just under 5% from June in Chittenden and Franklin counties alone. In June, mortgage applications hit numbers lower than they’ve seen since the early 2000s.

What’s the bottom line? People understandably feel uncertain when there is a change in the market - it can be scary because no one truly knows what’s to come. That coupled with rising interest rates has caused many people to put a pause on their plans to move altogether. And while the decrease in demand is a helpful thing in terms of cooling off the market, the huge dip in new inventory does offset some of that. We’ll need more inventory to hit the market in order to see home prices come down. 

 

Pricing Changes and Opportunities for Buyers

For those that are currently looking to purchase a new home, the silver lining of the lessening in demand is that it has created an area of opportunity where buyers can add contingencies like home inspections to their offer and negotiate on price - things that they often had to forego over the last two years to have any hope of getting their offer accepted. That said, there are still multiple offer situations with homes selling for over asking, but the frequency of those situations is drastically different than it was even 4-6 months ago. While the average home still sold for 7% over asking in the month of July, we saw a 4.3% decrease in the listing price of new inventory when compared to June. And the sales price these homes actually sold for was an average of 3% lower in July than it was in June. While we know this isn’t a huge difference, it’s the first time the sales price has decreased in a long time and it’s a good sign that home prices will start to come down at least a little bit.

What’s the bottom line? While this is great news for buyers, it will certainly be something sellers will have to adjust to. We’ve already started seeing this - in our May market update we talked about the increase in price drops that we were seeing. That has continued and days on market have even increased in some of the more rural parts of the state. Sellers generally take a while to adjust, so it will realistically probably take until next year before you start seeing a more significant adjustment in prices, though it all really depends on what happens with inventory. The good news for sellers is that you’re still going to be getting more money than you would have 2-3+ years ago. The median home price in Vermont was $235,000 in all 2019 and now sits at $353,500 YTD in 2022 - that is a 150 % increase in just three years, and there is no denying that that is a great return!

Looking to buy, sell or just want more real estate advice, tips and market knowledge? Reach out, I’d love to chat!