In 2023, the real estate landscape faced unforeseen challenges, largely due to the Federal Reserve's aggressive interest rate hikes. These measures, aimed at stabilizing the economy, inadvertently caused mortgage rates to soar, nearly surpassing 8% and leading to significant market apprehension. This development was particularly startling as it aligned with the 7.74% 52-year average of mortgage interest rates, reminding us that historical context is crucial in understanding market dynamics. People who bought homes in the early 1980s can remember rates reaching nearly 20%. As they say, everything is a matter of perspective.
The one constant thing in the real estate industry is that it is and has always been very cyclical. The pandemic-induced market frenzy, fueled by quantitative easing and economic stimuli, had led to an artificial boom in 2021. As a result, we saw a record sales year for most brokerages and agents alike. We knew this market was accelerated and artificial, because maintaining such low interest rates and pumping money into the economy is ultimately untenable. Thus, the market resulted in a frenzy of excessive buyer demand, multiple offers, buyers willing to pay over appraised value and bridge the gap on the difference, and many other creative tactics to be the winning bid for a home. As expected, values began to appreciate dramatically, and affordability eroded at an equal clip.
However, the subsequent market correction was not indicative of a crash akin to the 2007-2009 Great Recession, but a recalibration following extraordinary circumstances. After about the sixth federal funds rate increase in 2022, the real estate market came to almost a screeching halt. The best analogy to describe this is if one was traveling on a bullet train at 100 miles an hour, and then suddenly
somebody triggers the emergency brake, and the train comes to a screeching halt. Most people would be in shock for up to 5 minutes and not move until they knew they were OK. Within the real estate industry context, the emergency brake was the rate hikes, and indeed, the train came to a screeching halt and people were in shock.
Amidst this turmoil, the real estate market demonstrated its resilience. Fortunately, in early 2023, the train began to move forward, albeit slowly, but deliberately. Most realized that the sky had not fallen, the market had not crashed, and there was still enough buyer and seller demand to keep things moving.
Anticipating the challenges of 2023, we adopted a proactive stance, embracing the motto "Relentless in 2023." Our strategy focused on maintaining robust support and resources for our agents, contrary to the industry trend of downsizing. We made some key investments in tools and resources that helped enhance our agent's ability to service their clients even more effectively. While other companies were cutting back a significant number of resources, laying off employees, and, even worse, shutting down offices, we stayed the course and continued to move forward and grow.
This approach paid off, with our company outperforming the four-county markets we serve (Fresno, Tulare, Kings, and Kern counties). We also hired nearly 100 new agents, and opened an Exeter satellite office. In addition, in a year where national statistics showed 49% of agents selling one or no homes, over 61% of our agents exceeded this benchmark, showcasing our resilience in a tough market.
We are currently seeing predictions all over the place, anywhere from a 1.5% to 23% increase in existing home sales for 2024. The National Association of Realtors' Chief Economist, Lawrence Yun, is predicting 13.5% and California Association of Realtors' Chief Economist, Jordan Levine, is predicting 22.9%.
We are predicting 15% for our blended four-county markets. Which economists will be right, only time will tell. However, the sentiment of most is that the 2024 real estate market will be stronger than 2023. This is generally attributed to the fact that mortgage interest rates are expected to decrease as the Federal Reserve ends its war on inflation and begins decreasing the short-term interest rate in effort to ward off a recession.
How quickly they do that will determine when mortgage interest rates really start to push down. The common sentiment among most economists is that we'll see average rates ranging from 6% to 6.5% in 2024. The only way interest rates will push below a 6% average for the year would be either early and multiple Federal Reserve rate decreases, or the economy pushing into recession, which would create new issues and potential side effects to deal with.
Of course, everybody is hoping for a soft landing that gradually pushes us into the 5% interest rate range at or before the end of the year, with no recession. The rate reductions should happen gradually rather than abruptly, which could spark a huge surge in buyer demand and wipe out existing listing inventory, resulting in another large surge in home values.
What we have going for us in our four-county markets is that they are amongst the most affordable cost-of-living areas in California. In addition, these counties are experiencing significant economic growth as labor, real estate, and new construction are very inexpensive compared to other parts of the state. This, coupled with the amazing standard of living and lifestyle, will continue to attract people to our area and provide robust local real estate markets.
The following table shows what happened in 2022, 2023 and our predictions for 2024 in our combined four-county markets.
|% YTY Change
|% YTY Change
|Housing Affordability Index
|30-Year Fixed Rate Mortgage
* Statistics are blended for the four counties. 2022 and 2023 data provided by C.A.R. 2024 forecast by Mike Allen.
Given the higher interest rates of the past year and market volatility, many people have remained on the fence when deciding whether to buy or sell a home. We believe it is always the right time to buy or sell if our client has the need, desire, and ability to do so. Attempting to time the market often comes with tremendous opportunity costs the longer you wait. As the ancient Chinese proverb goes, the best time to plant a tree was 20 years ago. The second-best time is now.
For potential sellers, now is a good time as most that bought over 2 years ago are sitting on a substantial amount of equity, which they can transfer to the purchase of their new home in most cases tax-free. In addition, resale home inventory levels are still dramatically low, given current buyer demand, which will bring more attention to their home and perhaps a higher price. Also, if they are purchasing a replacement home, while demand is strong, it is a great time to shop, as we aren’t in a current market frenzy, which would place them up against multiple buyers and facing bidding wars on every listing.
For potential buyers, the climate is much better than a year ago, as their affordability has increased with the lower mortgage interest rates. Many buyers are sitting on the sidelines waiting for the interest rates to go even lower, which creates a less competitive environment. The days of the 2%-3% are never coming back, at least anytime soon, so they may be waiting a long time if that’s their goal. Also, home values have remained relatively stable over the last year in our markets so buyers can get more value this year for the same price. Last, buyers should remember that mortgage interest rates are not permanent, as they can always refinance the loan in the future. So, it's better not to wait to purchase that dream home, but hit the "deal" button now.
Propetech is the underlying technology real estate professionals use to enhance their clients' experience by creating smoother and more efficient transactions. If real estate professionals and brokerages haven’t embraced proptech, they are dramatically behind. If the emergence and high-level
adoption of Zillow, Realtor.com, and Trulia since the 2000s doesn't convince you, then you have been living in a cave and perhaps using stone tools.
For example, it is a must to have a state-of-the-art Customer Relationship Management (CRM) system to manage clients and effectively communicate with them. Also, we saw the acceleration of the need for proptech during the COVID-19 pandemic. An October 2021 survey of U.S. and Canadian real estate professionals revealed automating repetitive tasks to be the top issue they believed proptech could help overcome. It also showed virtual showings had become the most widely used form of proptech during that time.
In addition to, but complimentary with, the use of Artificial Intelligence and at a real estate professional and brokerage level dramatically accelerated with the release of AI chatbots such as ChatGPT and Bing AI. The report reveals that real estate professionals most popular use is writing property descriptions, with 82% of agents turning to AI for that common industry task.
Other popular uses for AI among real estate agents include writing blog posts and communication at 67%, generating social media content at 60%, and writing content for websites at 44%.
As mentioned, most economists feel that we will settle in at an average of 6%-6.5% mortgage interest rates in 2024, but will likely not see rates down into the 5% range until 2025. While the average rates will be above 6%, we feel that we will see rates in the higher 5% range by the fourth quarter of this year.
The Feds are currently delaying any funds rate decreases, as they are still concerned about ensuring that the consumer price index is heading in the right direction to reach the 2% goal by the end of this year. We closed out last year at 3.4%, up 0.3% from the prior month. In addition, unemployment rates were still at 3.7%, rather than the desired 5%. Despite this, they are also very concerned about putting the economy into a recession.
With the overall feeling that we are heading in the right direction, they have spoken about being more aggressive with an estimated five rate cuts this year. They signaled at their meeting in December that they are done raising its policy rate and are poised to reduce it by 75 basis points in 2024, with more cuts to follow. We may see them sooner than anticipated, some predicting as early as March. If this happens, we feel that 5% rates in Q4 are likely.
Also, given that we are in an election year, there will undoubtedly be pressure to get inflation under control and reduce the cost of borrowing on or before the November ballot.
While most people feel that the real estate transaction is just an algorithmic process, the actuality couldn't be further from the truth. We indeed list homes in multiple listing services and utilize the same State contracts and disclosures to facilitate the transaction. However, the experience and outcome of a transaction can be far different from each other even though transactions ultimately get done. One client could feel that their agent was an absolute hero at the end of the process, while the other client might feel that their agent was horrible, even though they both closed their transactions on time.
So, here is the difference. Variables include an agent’s experience, training, brokerage support, marketing techniques, availability and use of proptech, effective use of AI, and what we feel is still most important in the process, an agent's empathy towards the client's needs and challenges. These are all crucial to providing an extraordinary experience. If any one of these things are missing, then it is like having a flat tire in your business.
As a brokerage, we aim to be our client's trusted advisor and go-to for all real estate questions and needs. And with that, we desire that any interaction with our real estate professionals be extraordinary, with no exceptions.
This level of service and client value proposition will become the rule moving forward, not the exception.
There will continue to be an exodus from California metropolitan markets to more rural and affordable cost-of-living areas such as our four counties. This stems from a growing demand for larger homes with enhanced amenities and a better cost and standard of living. Also, in our post-pandemic economy, many companies allow their employees to work remotely from anywhere with internet service.
Another factor is that we are seeing the Baby Boomer generation begin to retire on an accelerated level, many of whom are selling their homes in higher cost-of-living markets, and retiring in more affordable communities like ours, so that their retirement dollars go much further.
When the real estate market is hot, and inventory and interest rates are low, it seems like homes can virtually sell themselves. During these periods, you tend to see the emergence of many types of new real estate brokerages, many of which are either limited service or nearly self-service. Many emerging brokerages do not value strong branding, marketing, tools, resources, agent training & education, and ultimately do not focus on providing a positive client experience.
We still believe that the adage, “You get what you pay for”, is entirely relevant, particularly when dealing with most people's largest financial transaction they might ever do in their lives. We take this seriously and feel that the full-service nationally-branded brokerages are in the best position to service clients in any market, particularly in challenging times. Iconic brands such as Century 21 has been around for 53 years and has survived in every up-and-down economy and market since then, and has historically come out stronger than ever on the other end.
While ther is probably some demand and an application for internet real estate brokerages and limited-service brokerages, most clients seek the highest return on their investment with the best transactional experience possible. Ultimately, most people want to deal with real people, face-to- face and voice-to-voice. Again, long-term brokerages like ours are best positioned to ensure this.
Century 21 Jordan-Link & Company