Inflation, Recession, Stagnation, and Real Estate 2022

June 16, 2022

Inflation, Recession, Stagnation, and Real Estate 2022

Here’s a quick summary of what happened to the market (spoiler alert: it is nuts!) over the weekend: 

Inflation is much higher than we thought, and that is obviously going to cause some problems. A month ago, the Fed said they’d be raising rates to 0.5%, but now, because of higher inflation, they are raising rates to 0.75%. And we need to wait and see if mortgage rates will go up a little bit or stay within the 5% range because they planned for a 0.5% increase, but 0.75% might not be what they expected.

So we will talk about inflation, the rates, the housing market, some data from Altos Research, and what areas we need to watch out for in case there is a big turn in the economy and real estate. Let’s dive right into it.

Overvalued Markets and Top 40 Regions to Watch

Based on data by Moody's Analytics, Fortune released an article about the top 40 regions that are most likely to get home price declines in case a recession hits.

According to the article, “Unlike the housing bubble that popped in 2008, the pandemic housing boom isn’t underpinned by a frenzy of speculation, Moody’s Analytics chief economist Mark Zandi says." “While home flipping has certainly ticked up during the pandemic," he says, "we aren’t seeing the exuberance of the last bubble.”

Moody's Analytics gave Fortune exclusive access to its updated proprietary analysis of U.S. housing markets—showing which markets they feel, based on their data, are most likely to go down.

“The firm aimed to find out whether fundamentals, including local income levels, could support local home prices. The finding? Through the first quarter of 2022, national house prices are "overvalued" by 24.7%,” Fortune says.

And when they said “overvalued” it means, in a sense, that people can’t afford housing in those areas, which is what we are actually seeing now.

In the article, you’ll see an interactive map showing “the degree to which regional home prices are overvalued or undervalued, according to Moody's Analytics.”

I'm a California-based real estate advisor, so I’ll start with the state. You'll notice that most California markets are overvalued by 5% to 38.8% (color-coded yellow to red-orange). 

You’ll also see that Boise (71.7%), some parts of Arizona (Lake Havasu 58.3%, Flagstaff 60.6%, Prescott Valley 50.1%, Phoenix 53.8%), Nashville (54%), Austin, Texas (61%), and some parts of Florida (45% to 57%) are overvalued (color-coded red-violet to dark blue).

They also have another map that gets a lot more specific, pointing out that “These 40 regional housing markets are the most likely to see home prices fall over the coming 12 months.”

The top five in the ranking are: 

Some parts of Florida made it to the top 40, namely Tampa (6th), Jacksonville (10th), and Miami and Ft. Lauderdale (29th). Austin is ranked 24th, and Nashville, TN is 31st.

It is a little different than in 2008, even though the areas to watch out for are targeted. A lot of people moved to Boise, Arizona, and even Florida, but if you look at it, especially in Florida, not a lot of it is considered overvalued. That’s because the main parameter in how they determine what metros are overvalued is affordability—whether or not people can afford the home prices. Of course, that takes into account the wages and unemployment rates locally.

So, keep an eye out on these areas because real estate is very regional.

You can also check out the report from Florida Atlantic University showing the top 100 housing markets that are overvalued. In this report, the top ten areas are:

When looking at this list, I also want you to take a look at the economy of these metros. How are the local economy and wages doing? It is important to see what companies have jumped in those areas and what new job opportunities they have created as well.

Even though they are considered overvalued, it’s important to also take a look at their sustainability.

A look at Boise, Idaho: Altos Research data

If you subscribe to Altos Research, you can pull up real-time data on market trends in specific regions. They have a Market Action Index, a Real-Time Market Profile, and even a breakdown of market segments where they show statistics on specific price points in that area.

According to Altos Research data, it is still a pretty strong seller’s market in Boise, ID at 62 market action index. They also show under the market profile what the median price point is, the price per square foot, average days on market, price decrease, and inventory (it went up slightly at 487) over the last 30 days.

They also show the median rent price—this is, for me, the most important indicator to tell whether a certain market will tank or not. Based on the median rent price, you can calculate whether the rent price matches the amount you’ll be paying if you bought a home.

They also provide a breakdown of different price points in the area, and based on the current data, the average days on market in Boise for the lower price points is still around 10 days, which means it is still a pretty hot market for lower-priced homes, despite Boise ranking first for overvalued housing markets.

Inflation in the News and What Stagflation Means

Right now, these are the headlines about some of the challenges we’re facing as a nation:

But there are sections that you are not paying attention to that I want to highlight. It is clear that we are having a problem on the stock market side, and a lot of people say we’re already in a recession.

If we really head into a recession, the challenge is that with real estate, we don’t get to see a lot of what happens until a few months later.

Right now, what we are seeing, especially in the summer months, is a lot of homes coming on the market (which is normal), and we’re still seeing demand there.

If the economy tanks more, demand is obviously going to go down. But as it stands right now, we’re okay (in real estate). And even if the interest rates go up a little bit, it’s still not bad.

But it is important to pay attention to the overvalued and “at-risk” areas that I mentioned earlier, because, again, real estate is extremely regional.

I also kept on reading that we are in stagflation, so I looked up what stagflation means again. According to Investopedia, Stagflation is characterized by slow economic growth and relatively high unemployment—or economic stagnation—which is at the same time accompanied by rising prices (i.e., inflation).

So, I looked up the unemployment rate, and right now, it is significantly low (3.6%).

Based on that definition, it doesn’t look like we are in stagflation unless we look at the alternative definition:

Stagflation can be alternatively defined as a period of inflation combined with a decline in the gross domestic product (GDP). (Source: Investopedia)

Based on where we’re at, it looks like we’re going to have another quarter of negative GDP,  which means, at that point, we would be officially in a recession, but there hasn’t been an official announcement.

Final Thoughts

Pay attention to these little details. If you are in real estate, subscribe to Altos Research to get the latest data, and if you are not, you can still get it if you are interested in looking deeper into what’s happening in the housing market.

I want to end with this (because you’re going to hear both sides of this). You’re going to hear we’re in a housing crash, and some will tell you we’re not. I want to tell you that nobody knows for sure because things can change in a snap.

Right now, based on the data, it looks like real estate is heading towards a normal market. And the last thing the Fed wants—even though they messed up and should have started raising the rate earlier—is to have a housing market crash.

Because housing is about 15% to 18% of the GDP of the whole nation. Whether it touches insurance, builders, or everything related to real estate, that is a pretty massive piece of the GDP. So the Fed doesn’t want the housing market to fall apart.