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The housing market in 2018 has followed the trend of 2016 and 2017 by continuing the unbalanced condition where sellers are in short supply and buyers are abundant (250k and under). The difference is that the 2016 and 2017 markets were helped by tailwinds while the 2018 market was hindered by headwinds. As the busy season ends and the traditionally slow fall season begins, 2018's differences are easier to detect. Buyers are still paying a premium for just listed houses, but discounting houses that have been on the market for 30 days or longer. Inventory is starting to build and it will not take a lot of time before buyers realize that they now have a lot of control over pricing.

Housing inventory should shrink during the fall and winter as sellers usually wait until spring to list their houses and buyers disappear in the fall and wait until mid January to start their home search. I expect this trend to continue in 2019, albeit at a less intense level.

What are the headwinds? Interest rates are creeping up as the Federal Reserve had begun a concerted effort in 2017 to raise interest rates 25 basis points at a time. Rates are still very low by historical standards, but any increase in interest rates raises the cost of owning a home and that puts pressure on pricing. Plus, there are some early indicators that the economy may be nearing its apex. A less than robust spring session next year would indicate that this housing market is maturing.

The table below illustrates the impact of rising mortage rates. The table assumes a $200,000 purchase price, 30 year 95% conventional loan, $350 in taxes, $150 in insurance & $100 in MIP per month.

Rate Payment
3.5% $1,453
4.0% $1,506
4.5% $1,563
5.0% $1,620
5.5% $1,679
6.0% $1,739

Most buyers don't look as much at the purchase price as they do the payment, because their mortgage qualification is limited by payment. The table below keeps the monthly payment static at around $1,450 and adjusts the purchase price. Taxes, insurance and MIP are also adjusted as the value of the property changes.

Rate Payment
3.5% $200,000
4.0% $193,000
4.5% $186,000
5.0% $179,000
5.5% $173,000
6.0% $167,000

As you can see, rising interest rates have a significant effect on pricing. Rates for 30 year conventional loans were roughly 3.5% at the low point of the mortgage rate cycle and 6.0% is a reasonable projection of rates at what we expect to the peak of the intermediate term interest rate cycle.


A slow down in demand for the entry and mid level houses in addition to homeowners and investors looking to cash out at these high levels could spell trouble for the market next year. Low inventory levels in the entry level properties and huge demand, both from home buyers and investors, powered the market rise since the 2012 bottom. I suspect that demand going to moderate this year and pricing will stabilize in the entry level properties and decline in mid and high end properties. Look for theses signs that we may be approaching a top in the market.


The improvement in the economy over the last few years has brought back that old euphoria that pushed housing prices to unsustainable levels thirteen years ago. The buyers most adversely affected by the recession have lost their fear of housing and have been aggressively buying. This aggressive buying seems to be moderating. It is not healthy for markets to be out of balance for long and they always gravitate to their equilibrium point. This is what appears to be happening now. If you are thinking of selling, you may want to put your house on the market sooner rather than later.

A very important factor in pricing is property condition. The more attractive a property looks, the more it will sell for. While it is understandable that sellers hesitate to put money into a property that they are going to sell, just imagine how the buyer feels about having to take money out of pocket (assuming they have it) and put it into their new house. If they have to spend money, they will discount the house accordingly. In most cases buyers greatly overestimate the cost of repairs. Our Selling Tips page in the Sellers section of the site has great tips for improving the appearance of your house without spending a lot of money.


Housing remains a good value and interest rates are low from a historical perspective. The upper end houses reflect very good values relative to replacement cost. Eventually, as the economy improves, they can be expected to rise with inflation, as housing has throughout most of history. Rates are low, but rising. Pricing on entry level housing is somewhat extended, but still a better value than renting. Low mortgage rates help keep payments low and equity builds with each mortgage payment. As rates rise, buyers will have to settle for less house to stay within their budgets. Rates will probably never be this low again. Waiting could be expensive.

Sellers typically don't get all their money back for improvements when they sell, which means the buyer is getting many upgrades and updates at a discount. Also, look at the financial cost by comparing the added monthly cost of buying a house that is move in ready versus the opportunity cost on the out of pocket money you spend for repairing a cheaper house. For instance, at 4.375% on a 30-year mortgage every thousand more you spend for the house costs you about $5.00 more on your monthly payment. If you save $10,000 on the price, how much can you repair for $50 a month? Carefully weighing all the factors will help you make the best financial decision. By the way, don't put much stock in the fixer upper and flipping shows that are popular on HGTV and other channels. They make great viewing, but have little basis in reality. Most of those that are successful at it do it professionally.

To read a discussion on the 2005 - 2010 housing decline please click here.

  August 28, 2018

Written by Mike Salkin, Berkshire Real Estate market analyst.


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