There is only one question that seems to matter in real estate right now. Well it’s more like different variations of the same question.
“When is the housing market going to crash again?”
“Are we in a housing bubble?”
“When will I be able to afford a home?”
“Is a recession coming or are we already in one?”
The only correct answer to any of these questions, of course, is a healthy “I don’t know, neither do you, neither does anybody.”
The people running the federal reserve don’t even know what’s going on or what to do about it, so I certainly don’t. The best advice I’ll give in this whole video is that if you come across anyone who claims to have a definitive answer to any of this, on the internet or otherwise, run away as fast as you can!
That said, I do have several facts and figures to share with you and some thoughts on them.
I fully expect many of the things I say in this video to not age well. That's how it goes when you try to make things topical and up to date while taking some big swings. This is simply my opinion at this moment in time and I am certainly open to being wrong. I maintain that even if parts of it do end up being "wrong" you will still benefit from the points of view I share and by having some historical context.
Reasons you SHOULD listen to me are that A. I’m a real estate agent, B. Prior to getting into real estate I was a financial adviser with a couple top notch firms you’ve for sure heard of and had my Series 7, 6, 65, and 66 licenses which, not to be overly braggadocios, are not that easy to get. I also studied economics and finance at Indiana University and have been reading the Wall Street Journal pretty much every day since I was about 12 years old.
Reasons you SHOULDN’T listen to me? I’m not currently a financial adviser and all those fancy licenses I just talked about have expired. I have no crystal ball. THIS IS ALL OPINION AND NOT TO BE TAKEN AS FINANCIAL ADVICE. Odds are if your mind is already made up about where things are going because your Uncle Ned who's a tell at the local bank said so, I’m unlikely to change that opinion anyway.
Another reason could be because you think I’m biased. That my career is impacted by how well the market is doing. This may be true to an extent. Sure, if there were a world where everybody felt great and confident about the market that would make my job easier. But that is rarely the case. Every market condition tends to be good for some people and bad for others. There are ALWAYS people buying and selling real estate in any market. A real estate agent’s success depends on finding and providing value to those people, regardless of what’s going on in the market. My goal is not to convince anyone of anything, only to provide the best value I can so you can make your own well-informed, data-driven decisions.
Enough of the preamble.
Here’s why waiting for the market to crash to get into it is dumb, even if it actually happens.
1. A BAD ECONOMY DOES NOT NECESSARILY EQUAL A BAD HOUSING MARKET!
I’ll get into specifics in a moment but first, I need to have a heart-to-heart with my fellow Millennials. Younger Gen Xers and older Gen Zers might sneak in here too but really anyone who all we know from our life experience of ‘08 is that “Bad Economy = Lower Housing Prices” or “Recession = Housing Market Crash”
This is simply not true.
The recession of 2008 was a complete outlier for a number of reasons, perhaps the biggest of which being that the housing market crash was NOT a result of the recession.
The recession was a result of the housing market crash.
And the housing crash itself was a result of a perfect storm of greed and incompetence the likes of which are not at all what is happening right now. The exact details of what happened are a bit outside the scope of this video, check out the movie The Big Short if you’re interested for more on that.
Bottom line is, the real estate market as a whole tends to do well or at least maintain its value in times of economic uncertainty. It makes sense when you think about it conceptually. When the stock market is falling, people are taking their money out of assets that they regard to be riskier than they would like. From there, the market will seek safer stores of value. This is why commodities like gold and silver have long been favorite hedges against economic instability, and why real estate is as well.
Bottom line: Real estate is historically very stable regardless of what else is going on around it
2. THE DATA IS NOT POINTING TO A "MARKET CRASH"!
(Though it might be pointing to a sharp "correction".. eventually..)
At the time of writing/recording (mid July 2022), 30 year fixed mortgage rates are sitting at about 5.9% on average. They were half of that mere months ago. Inflation is north of 8% and the fed’s rate raises don’t seem to have much of an impact on that yet.
So far investors are betting that the FED will pull back once we reach a recession, which at this point feel inevitable. This seems to me a risky bet and based in large part on confidence that inflation will be under control. If we reach a situation where we are experiencing declining growth AND high inflation, all bets are off regarding stable interest rates as investors lose confidence in shorter term debt instruments and the FED runs out of tricks to pull.
(Again, this is all speculation and not financial advice)
As you’ve seen I’m careful to avoid acting like I know the future. That said, despite recent events pointing the contrary, I think in the long run interest rates have a lot of room to continue increasing.
Not in a straight line, though. If it’s 5.9% today it could be 5.7% tomorrow. Nothing is ever linear. But over time I believe there is a good chance we'll see them be significantly higher before they will be significantly lower. My bet is we may never see sub 3% interest rates again (we should all hope we never see that again, since the only reason we did in the first place was a worldwide pandemic, crushing economy, and a major war in Ukraine).
These rate hikes are for sure having a major impact on the demand side of the price equation. According to Zillow, new contracts across the country were down an absurd 27% year over year in June of 2022.
You might be saying at that point “well that must mean prices will come down if the demand has decreased so dramatically!”
This could be true except that the supply has also decreased by 8%, and the supply side is really where the problem has been for the last several years. Rather than fall, prices have actually increased 18% year over year nationally.
For there to be real, needle moving changes in the prices of homes we need more supply, and there doesn’t seem to be an obvious reason for that to happen anywhere on the horizon.
Homeowners currently have near record levels of equity in their homes. This is another HUGE difference between what was going on leading up to the ‘08 crash and what’s going on now.
In ‘08, there was a combination of homeowners being given stupidly high loan-to-value (LTV) mortgages (100% loans in many cases) with very loose underwriting requirements, as well as a glut of homeowners cashing in on the equity with home equity lines of credit (HELOCs) and using their rapidly appreciating homes as an ATM, often times to double down on getting more real estate and going further into debt.
When the house of cards came tumbling down, a large number of people who could no longer make payments were under water on their mortgage and this led to a surge of foreclosures and distressed properties all hitting the market at the same time and the depressed value of those homes helped bring down the rest of the market with them.
That is not the case today. Lending standards are incredibly strict. HELOCs and similar products still have their place but are considered much more niche and also have stricter standards than in the 2000s.
In my practice, just speaking anecdotally, it seems that nearly all the listings I show and sellers I talk to are selling because they absolutely have to move, usually for a job relocation or sometimes for something involving their children’s schooling. Sellers see how tough it is to buy in this market and are in no hurry to participate in that themselves.
Buyers can’t buy because sellers also can’t (or don’t want to) buy.
Chicken and the egg. Snake eating itself. Dog chasing its tail. Whatever other circular, animal related metaphor you can think of.
Bottom line: For there to be price decline truly worthy of the word "crash", we need an overwhelming surplus of supply in the market by way of foreclosures and distressed properties. At this point in time, there is no reason to suggest that is going to happen.
3. UNLESS PAYING IN CASH, LOWER PRICES DO NOT EQUAL MORE AFFORDABLE PAYMENTS OR MORE FUTURE EQUITY
(Especially if rising interest rates prove to be the main culprit behind the lower prices)
Let’s just assume for a moment that rising interest rates get to a point where the demand has almost completely petered out, the market has softened, and prices do incur a sharp correction of 5-10% from recent highs (a scenario I do believe is very plausible).
Scenario 1 - The 30 year fixed payment you would have on a $350,000 home (roughly the national average) with a 5.9% interest rate (not including taxes, insurance, or HOA fees) and 20% down would be $1,660.78
Let’s say over the next few months, interest rates go up another couple points to 7.9% (a scenario I believe is just about guaranteed, if not higher.. just my opinion of course) and that this cools the market to that steep 10% drop.
Scenario 2 - The 30 year fixed payment you would have on a $315,000 home with a 7.9% interest rate (not including taxes, insurance, or HOA fees) and 20% down would be $1,831.55
So, congratulations. While you were losing 8% of your buying power to inflation sitting on the sidelines waiting for prices to drop 10%, the prize you get is the ability to now pay 10% more per month for the same property even though you’re “getting a good deal on it.”
And that’s not all.
In Scenario 1 where you bought at the higher price with the lower interest rate, after 5 years the principal on your loan would be $260,228.11 for 34.5% home equity, controlling for changes (up or down) in market value.
In Scenario 2 with the lower price and the higher interest rate, after 5 years the principal owed is $239,354.59 for 31.6% equity, again assuming no change in market value.
Once more, you’re about 10% better off having gone with the higher price, lower interest rate scenario on both the front end and the back end.
(The big real-world variable there of course being the market value)
At this point a good counter-argument would be “yes, but at least I didn’t have to be the one that ate that dip in the home’s value!”
True. Good point. Assuming you were looking to sell again within a small amount of time, something that is risky in any market even if you are an expert house flipper.
Let’s refer back to this chart
Q1 of 2007 was the worst time literally in the history of American real estate to buy a home. The market started crashing after that, plummeting 19% (!!!) from that point in two years (Q1 2009).
Fast forward to Q1 of 2013 though, and the Q1 2007 buyer was back up to at least breaking even and then some.
The worst (and, really, only) market crash real estate has ever seen took 6 years to cycle through and recover.
According to the National Association of Realtors, the average homeowner will own their home for 13 years.
So, what are we really talking about here?
As long as you have a long enough time horizon, a healthy long-term outlook, and aren’t living and dying by looking at estimates of what your home is worth all the time, you’ll be fine.
Bottom line: Interest rates matter, run your numbers!
4. THE "MARRY THE HOME, DATE THE INTEREST RATE" STRATEGY MAY BE RISKIER THAN YOU THINK
This is the most speculative and, perhaps, controversial of the points which is why I saved it for last.
There is a common notion, which I believe to be caused by a big dose of recency bias from the number of adults (hello again Millennials!) who only know a world of super low interest rates, that even if interest rates continue to climb and that this is the reason for lower housing prices, that this is okay because one can simply "refinance when rates come back down."
In theory, for most of the past 35ish years, this has been true.
Looking at this graph again, starting from the mid-80s it's rare to find an interval where you weren't able to refinance at a lower rate within 5 years at most. It did happen though. Anyone who financed in 2013 was waiting about 7 years to find that elusive lower rate, and my prediction is anyone who bought in the last year or two with sub-3% rates may be waiting literally forever to find a rate better than that.
The elephant in the room is the absolute absurdity that was going on in the late-70s to early-80s. This is an era that on the surface had more in common on a macro scale with what we face today than any era since. Rampant inflation, oil issues, potential for stagflation, etc.
While everyone else is wondering if we are heading for the next '08, I'm wondering if it's more likely we're heading for the next '79!
If you had financed a home in the mid-70s, you would have been waiting nearly 17 years for an opportunity to refinance at a lower rate!
This is not necessarily a prediction or fearmongering. Just something to look out for. As mentioned above, at this point in time there is an argument to be had that interest rates will stabilize and fall again as the FED pulls back once we reach recession status and the labor market begins to show more vulnerability. Hopefully this is the case, because that will mean they are confident that the rate hikes they've introduced so far have been successful with the inflation we face.
Bottom line: Basing a strategy around the ability to refinance at a lower rate in this economic climate is not without its fair share of risk
Disclaimers abound on this topic, of course. I’m only going off of what the data is telling me at this moment and my opinion is subject to change based on new information or changes in the market. I am very open to being wrong about any and all of this. Most of the data I’ve referred to is on a national scale and real estate is obviously a hyper local situation. Things will vary widely from block to block, city to city, region to region, etc.
I just hope this has given you something to think about and provides a little historical context that I believe can be helpful no matter how “unprecedented” this moment in time may seem.