Let’s talk about how some economists are a little bit more scared than others as far as where the real estate market is heading.
They’re not sure whether the Fed is going to continue to raise the rates (at a higher rate), which will affect the economy and the housing market.
Others are scared that it’s going to cause an interest rate rise on the mortgage side.
Let’s take a look at what these economists are saying and what’s really happening.
The first one is an article from the Insider titled ‘The party is over’: A chief economist who called the 2008 housing bubble warns that home sales will continue to drop as demand gets crushed by rising mortgage rates—and says home prices are vulnerable to a near-term decline as a result.
This article uses a lot of strong words like “crushed,” “soaring,” “debacle,” and all these other difficult words. I guess it is what they have to do in order to get people to read the news. But let’s see what the article is saying.
According to Insider, “Federal Reserve hiked interest rates to curb four-decade-high inflation, mortgage rates have soared about 50%. That has crushed buying demand as monthly housing payments have become more expensive, sending the month’s supply of homes soaring to the highest level in 12 years.”
“New home inventory now stands at 9.0 months—up from 6.9 months in March—much higher than existing home inventory, at just 2.1 months,” Shepherdson wrote. (Source: Insider)
This is the monthly supply of new houses in the US, according to Fred, as of May 24th. Go check out the graph, in case you are wondering where that information came from.
It shows statistics on monthly house supply over the last 40 to 50 years. During the Great 2008 Recession, there were a lot of new homes coming on the market. And then, all of a sudden, it dropped in the span of a decade. Now we are heading back up. Obviously, nine months of supply is a lot, so they are definitely leading the way as far as catching up with that supply and demand.
So, let’s talk a bit about the supply, because there is a difference (between the mentioned nine-month supply and the 2.1-month supply), and I don’t know if everyone understands the difference.
There’s a supply of new homes, which is up to a nine-month supply. And then there’s the inventory in the Multiple Listing Service (MLS) all throughout the US—that’s the resale of those homes that you see active, where you see “For Sale” signs and you see open houses. There’s a difference.
For those homes that just pop up everywhere (not new construction), there’s only a little over two months' supply, which is really low. Typically, the average is six months.
The average for new construction is also six months.
So, you can see that new construction is way over (nine months' supply), and the active listings are significantly low (two months' supply). Even though for this time period, May to July, we’re going to see an increase because more people put their homes up for sale on the market for the summer.
According to Insider, Shepherdson says, “All this means that home-price growth is due to continue slowing down and, in the near term, even fall.”
“But Shepherdson said the market was not like the mid-2000s and that prices would not crash in the same sustained way because there were far fewer adjustable-rate mortgages, which forced many homeowners to sell their properties the last time around,” says Insider. “About 40% of mortgages were adjustable in the mid-2000s compared with 1% now.”
That is a significant difference.
The Insider continues, “He also said a housing-market slowdown wouldn’t crash the economy like it did around 2008. But he said certain areas of the economy would ‘suffer.’ These include materials, appliances, and furniture.”
On top of inflation, that’s definitely something that we’re going to see happen.
“The main reason we think there is no US residential housing bubble is that housing supply is very tight,” Daan Struyven, a Senior Global Economist at Goldman Sachs, while acknowledging that rising mortgage rates and ambiguity around pricing present challenges. (Source: Insider)
We all know that we need to keep an eye on interest rates. We’ll talk about some leading indicators so we know where the market is going so that you can at least pay attention to the things you need to pay attention to.
The Insider also quotes David Rosenberg, the President and Chief Economist at Rosenberg Research, who recently said, “With the mortgage rates rising sharply and affordability constraints becoming so much more acute, the bursting of this bubble and the commensurate negative wealth effects promise to be spectacular.”
“Lachman said he saw a 15 to 20% decline ahead,” Insider says.
That’s also a little scary, right? That’s significantly more than some of the forecasts of these other companies like CoreLogic, Moody’s, or Zillow (Zillow says we’re going to go up significantly more this year).
These other companies are being conservative while these economists are saying, “There’s something more happening that we may not know about and we’re just going to call it, and it’s actually worse.”
I’m going to show you another piece that came out two weeks ago, also from Insider, and I don’t necessarily agree with them, but this is the article titled "Are we in a housing bubble? We asked 32 experts, and most said no.” They explain their answers and offer insight about what we could see with housing prices in the coming months.
David Rosenberg is one of the economists interviewed. According to this Insider article, David says, “We are in a housing bubble that rivals or even perhaps takes out the mania that took hold in the mid-2000s—the leverage is less acute, but the price action is equally parabolic and out of sync with the underlying fundamentals that typically drive real-estate valuations.”
Now, if you look at the data out there of the fundamentals, you fully understand that, at this point, he’s speculating as to what could happen. Because of everything we’ve taken a look at, we saw that we’re not at the point where there is an actual bubble or crash.
Could it happen? Of course. But it’s a fifty-fifty shot at that point.
I think Dave’s speculating too much here. Because all the data that’s showing everything that’s happening is really just real estate going into a normal market.
That’s why I hate reading these other economists saying that we are in a housing bubble and it’s going to crash.
Pay attention to the details. We’re living this on a daily basis. We’re in this - watching areas. And remember, real estate is regional, too.
In Redfin’s article dated May 27th, titled "Austin, Raleigh, and Other Popular Sun Belt Metros Lead the Nation in Homebuilding," they discuss some areas that might be facing harder challenges than others.
“Austin, TX had 31.1 single-family building permits per 10,000 people in the first quarter, the most per capita of any major U.S. metro. It’s followed by Raleigh, NC (30.7), Jacksonville, FL (29.2), Nashville, TN (26.6) and Charlotte, NC (22.9),” according to Redfin.
If you follow my YouTube videos, just recently, I also talked about the correlation between overvalued areas and the areas that people moved into during the pandemic frenzy. We also mentioned some of the other factors at play that we are looking at: the economy, unemployment, and demand in specific areas.
We saw that Boise, Idaho, and Atlanta, Georgia are some of the areas experiencing a slowdown—there are fewer and fewer multiple offers at certain price points at the top, and in some cases, no offers at all.
Pay attention to the regions where homebuilders went all out and now there’s a nine-month supply, and pay attention to rents. Is the rent (in specific areas) as high as it is to buy a home? If it is, then now we have to take a look at how long that will last. Is it going to continue through this possible recession?
There are a lot of points, and right now where we’re at, there isn’t anything to get excited about as far as a crash. It’s kind of just cooling down and coming to equilibrium, as I mentioned before.
I just want to share one other thing. These are the top US Housing Market Indicators, according to Investopedia. They are missing some, but these are the ones to watch out for.
Read the article. It has very valuable information, and I learned a lot from it.
And, it wasn’t on Investopedia’s list, but watch out for interest rates, as they really determine affordability. Also, inflation—where’s inflation going?
A recession doesn’t cause as many ups and downs in the real estate market as people would think. It’s more about the interest rate and affordability, the economy, and unemployment.
People who can't afford a home are less likely to buy one.