On today’s show we are talking about the changes that are happening in residential real estate. What I’m about to share with you on today’s show is a stratification of the market into three main segments.
Now what I’m sharing is not a scientific study. It’s the result of observation. The observation has raised questions. I’m going to share a thesis that might explain what we are seeing in the market.
What I’m seeing from conversations with investors and developers is a stratification of the market. There are entry level homes. These are the homes purchased by first time buyers. The category of home could be a condo in a dense urban environment, a townhouse, a semi-detached, or a small suburban bungalow. The next level up are mid range houses having a two car garage and usually four bedrooms. Above that are the luxury homes.
What we are seeing is that sales remain brisk at the top of the market. Those who are sitting on a lot of cash are not fundamentally going to have their lifestyle affected by an economic cycle. They’re probably paying all cash for the property, and are not really affected by rising interest rates.
At the bottom of the market, sales also remain brisk. There are those who fear being priced out of the market. So they are buying whatever they can in order not to miss out on home ownership.
We are seeing the greatest pause in the middle market. These are the people who would make a move to a more expensive property as a want, but not a need. It’s purely aspirational. They don’t need a bigger place. Their existing home is meeting their needs. Perhaps they have a growing family and could use an extra bedroom or space for one more vehicle. But they can still make their existing property work.
We have seen sales in this middle segment drop significantly in the past month.
Home builders that I speak with are seeing dramatic reductions in traffic at their sales centres in June. June is usually a peak month for new home sales. One volume building I spoke with is experiencing an 80% decline in traffic at their sales center. Deliveries won’t be until the following year, but many buyers are taking a wait and see approach. New homes won’t rate lock for permanent financing until they’re within 30 days of closing. Buyers are not willing to take the interest rate risk that far out in time if they don’t need to move.
Many buyers will need to see a period of interest rate stability before making a blind commitment that could create financial stress.
Host: Victor Menasce