Let me tell you something that you’re not going to like to hear: inventory levels aren’t going to increase significantly any time soon.
Sellers are stuck in a conundrum. They’re locked into glorious mortgages with interest rates around 3%, and the consequence of selling and moving means jumping into a new mortgage with an interest rate that’s more than double what they are currently paying.
For many, that means they quite literally can’t afford to move. For others, that means the crippling reality of doubling their mortgage payment.
The US inventory crisis isn’t going to correct itself until consumer mortgage rates drop down to a tolerable level. So, keep your eye on inflation and the Federal Reserve and make your own opinions on how banks will value their risk.
Why Does Bank Risk Tolerance Matter?
Home mortgage rates aren’t solely driven by the Fed’s rate. Banks pad in additional interest charges to cover their calculated risk for issuing the loan. This portion of interest rates is commonly called “the spread.”
The spread is the reason why we were seeing consumer mortgages hit 7% when the Fed’s rate was still at 3%. As banks become more confident in the direction the Fed is taking its rate, they are shrinking the spread.
But mortgages remain high, and those 2020 interest rates aren’t coming back anytime soon. Which means potential sellers are stuck, and inventory levels remain extraordinarily low.
There’s More Inventory Than You Think
I can tell you that as of the writing of this article (May 2023), there are just 29 homes listed for sale on the MLS in my hometown of Atherton, California. But that doesn’t mean that there aren’t more properties available for sale.
In the real estate industry, there exists a practice known as "off-market" or "pocket listings." These listings have long been a part of the residential real estate industry, but today they are gaining in popularity, especially in the luxury real estate sector.
In this real estate climate, you can expect as many as 30% more homes that are sitting off the MLS but which are also available for sale. So buyers, if you’re not finding the right property by browsing online, it’s time to talk to your real estate agent about off-market opportunities. These listings present an opportunity for interested buyers to access an exclusive range of properties beyond what is publicly advertised.
But there’s a catch. Because of their nature, off-market listings aren’t advertised. Agents rely on their professional network to draw in the right buyers. So buyers who don’t have a well-connected real estate agent are going to remain in the dark.
In today’s unprecedented real estate market, your buyer’s agent has never been more important.
What Benefits Do Sellers Get By Listing Off-Market?
The shift to off-market listings might seem counterintuitive in a seller’s market, but upon closer inspection, this new trend is driven by a multitude of strategic advantages.
If you’re a seller who isn’t under a time crunch, then listing off-market might seem like the more attractive option. These sellers benefit from:
- Increased Privacy.
The high level of privacy is by far the number one reason sellers opt for off-market listings.
Luxury home sellers highly value their privacy. Listing on the MLS requires publicly published home interior photos, videos, and an address. Particularly for high-profile clients, maintaining confidentiality is paramount. These sellers want to avoid unwanted attention and prying eyes, which listing off-market allows them.
- More Control Over the Sales Process.
Listing off-market puts more control of the sales process into the hands of the seller. They can screen who inspects their property and when. There’s no flurry of showings or open houses that typically come hand-in-hand with public MLS listings.
- Opportunity to Test the Market.
Pricing luxury homes is hard because they are often so incredibly unique, and there are often no recent comparable sales. As agents, we can provide expert price guidance, but the market will ultimately tell us what the home should be priced at.
We use off-market listings as a way to “test the waters” without the pressure of under or over-pricing that comes along with a traditional listing. It helps sellers and their agents gauge the level of interest and get feedback on pricing without a formal launch on the open market. If the property doesn’t sell off-market, we can readjust our strategy and be better prepared to list publicly while avoiding the stigma of a stale listing.
- Create a Sense of Exclusivity.
Off-market listings inherently establish a sense of exclusivity associated with a property. Buyers often feel privileged to have the opportunity to tour a unique, unlisted opportunity that can increase desire. For luxury properties, the allure of exclusivity can be a particularly effective sales strategy.
Listing off-market isn’t the right strategy for every seller, especially for those aiming for top dollar or who have a restricted timeline. It’s slow and usually doesn’t inspire the same level of competition as the open market. But off-market listings do offer sellers the benefits of privacy and control.
Our high interest rate environment is making financing challenging for buyers and potential sellers. A market that was once a flooded river has slowed to a trickle, and it’s difficult to forecast when it will begin to flow again.
Low inventory has created a supply-demand imbalance that favors sellers, creating the perfect conditions for off-market listings to take fire. Buyers need to ask their agents about any pocket listings and push them to network with other agents. In this market, having an agent with an extensive network will be your strongest asset.