Michigan’s residential real estate market cooling after record extremes

• Michigan’s real estate market slowed this summer as interest rate increases cut into sales
• Prices still increased, something that the industry doesn’t expect to continue
• Fewer showings of properties on the market suggest a further cooling that should show up in sales data this fall

After three summers of robust traffic, there has been a 14-percent decline in Michigan home showings through mid-August, according to Real Estate One, the state’s largest residential brokerage. 

Company president and broker Dan Elsea said the dip in showings among potential buyers — 40 percent of whom will list their homes on the market — portends an expected slowdown in the state’s long-heated housing market this fall as interest rates climb to around 6 percent, double what many people saw in 2021.

“It’s a leading indicator,” Elsea told Bridge Michigan of the drop in home showings. “When people stop looking at houses, that tells you something is going to happen.”

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The real estate market continues to change after a chaotic late winter and spring, when the pandemic-era buying frenzy hit new peaks. More recently, national and state data show sales falling — even as average sale prices increase.

Unclear, Elsea and other real estate industry leaders say, is exactly what is coming next. However, they are not expecting drastic changes, like during the Great Recession.

Instead, many areas of Michigan can look ahead to a more traditional real estate pace: Fewer multiple offers. Price reductions after a few weeks or more on the market.  Sale prices for some homes — like those recently remodeled — that could be 3 percent to 5 percent less than list price. Value drops for others, depending on location and condition.

Data from Realcomp, the Farmington Hills-based listing service used by real estate agents in southern and mid-Michigan, showed mixed signs in July. Median sales prices increased 7.9 percent, while closed sales dropped 15 percent and about a third of all sales took place in the same month they were listed, showing some homes still sell extremely fast.

At the same time, according to Real Estate One, more properties are only selling after price reductions — including nearly one-third of deals in southeast Michigan

For the moment, said Karen Kage, CEO of Realcomp, many sellers could still see quick sales above list price — at the exact moment when buyers could also see more housing options than they have in some time.

One thing that agents hope for, after two years of record-setting sales and lack of inventory, is that the average time a home remains on the market could once again extend beyond just a few weeks. That’s likely even in some of the most popular buying areas of the state, said Sandi Smith, broker at Trillium Real Estate of Ann Arbor and treasurer of the Michigan Association of Realtors.

“Buyers (will) have time to look at something and make a decision and think about it,” Smith said. “That's more palatable for everybody.”

Effects of rising inflation, interest rates

It’s difficult for the average person to see the market shift after news of record high home prices set in June, when the national median sale for a single family home hit $416,000, up 13.4 percent from a year earlier. In Michigan, the average home price was $284,466, up 17 percent from the same month in 2021.

“It’s hard for sellers to get to that come-down off that high we've had,” Smith said. “But to have a buyer who can sleep on (whether they want to make an offer) is a much healthier environment than what we've been living through.”

So far, Elsea said, “it’s still a seller’s market,” but higher lending rates appear to be having an impact. 

A typical 30-year mortgage this week would have an interest rate of around 5.9 percent, up from last year’s 3.5 percent, adding $144 to the monthly cost of a loan for every $100,000 borrowed. Borrowers with top credit and 20–percent down payments will pay slightly less, around 5.4 percent. The high this year was 6.18 percent, set in June.

The real estate industry contends that extremely low interest rates were an anomaly that lasted for years due in part to the pandemic and federal efforts to promote borrowing.

Now, mortgage rates are rising as the Federal Reserve increases the federal funds rate (the rate lenders pay to borrow from each other). It went up ¾ of a percentage point in July, and it’s expected to jump again in September, after warnings that inflation had not yet cooled enough.

The federal funds increase, in turn, affects many consumer credit interest rates, such as those associated with credit cards and home equity lines of credit, though the rate is not directly tied to mortgage increases.

Those costs are increasing as inflation continues to pressure most other consumer prices, including food, which continued to rise in July even as the annualized inflation rate remained stable that month at 8.5 percent. 

The Fed warned this month of another possible rate increase in September.

Home shoppers feel the changes, many Realtors said.

“There is less traffic, telephone calls and walk-ins,” said Craig Hinkle, broker/owner of RE/MAX of Grayling.

“I sense that buyers are getting extremely frustrated,” he said. “They’d go to look at something and make an offer, and there would be multiple bids. … Now when they find something, interest rates have doubled. So we’re noticing some pullback.”

Real Estate One officials are also tracking the number of new listings. In southeast Michigan, more homes priced at $750,000 or more are entering the market than a year ago.

Listings of homes priced at under $500,000 — including the starter range of under $250,000 — have declined. 

The higher-priced homes are selling better than a year ago, too.

“The lower price drops reflect the increased cost of homeownership, a combination of increased interest rates and higher prices,” Elsea said. “The upper end (sales) are less influenced by the increased interest rates.”

Rural markets slowing more quickly

Across the state, when a home is priced right and looks ready for move-in, sellers in bigger cities can still expect an offer soon after listing, Smith said. 

But sales in rural communities are slowing.

“My colleagues, I think, are talking about a little more grim situation, particularly in not such aggressive markets,” Smith said.

One example, Smith said, was a builder of a new home in the northeast Lower Peninsula who planned to list it soon for about $250,000 and worried about whether the time delay would eat into his profits as sales dropped in the region.

“I think that there's still a digital divide,” Smith added. “If people can get decent internet access and they can sit on the lakefront, they’re going to do it all day long. If you don’t have that access, you’re going to take a big hit.”

Through June, the lowest price appreciations in the state have been in the Branch County and Clare-Gladwin areas, followed by Shiawassee County and the Thumb area.

The highest year-to-date average sales prices as of June were in the Traverse City area ($457,262) and the greater Ann Arbor area ($436,045), two communities with far more buyers than homes on the market and, as a result, rising affordability concerns.

In Grand Rapids, where the number of buyers still far exceed supply, prices are not declining yet, said Edward Pinto, director of the AEI Housing Center, a Washington, D.C. policy think tank. More homes must reach the market for prices to come down, he added.

Grand Rapids “is still very far from having a price decline,” Pinto told the audience at the Grand Rapids Policy Conference, organized by the Grand Rapids Area Chamber of Commerce, on August 17.

Some Michigan waterfront property also continues to rise amid extreme demand. “Our shelves are empty,” said Hinkle, the Grayling broker, when it comes to homes with lake or river frontage.

That’s not the case with all of the properties in the greater Grayling area, Hinkle added. A home with obvious flaws or updating needs won’t get top dollar or — if priced at the top of the market — will linger as potential buyers reject it.

“Buyers do not want to buy properties that need work,” Hinkle said. 

Smith said she’s seen that in the greater Ann Arbor area through her brokerage and statewide in her role as an officer at MAR. 

Her advice to sellers agents is to consider a price reduction if it hasn’t received an offer in the first 10 days on the market. 

That’s a mindset change for agents and sellers, said Elsea, of Real Estate One.  

“If you're used to having a home sell in a week for over asking price, and it changes to four weeks at slightly below asking price,  then you think this is a big change.

“But we're moving to normal,  which is healthy because the pace we were at before was not.”

The long term outlook is that inflation will at some point get under control, Elsea said, removing fast-rising prices for things like food and gasoline from potential homebuyers’ budgeting and decision-making.

By fall, Elsea predicted, data from August sales will likely indicate that Michigan won’t see double-digit sales increases in 2023. 

“The homes that are selling now are selling for prices that are not 10 percent higher than a year ago. They're more like four or 5 percent higher than a year ago,” he said. 

“I think next year appreciation rates will be in the three to 4-percent range, in line with historical numbers.”