The housing market has peaked in 2022? | Why housing markets pop

June 13, 2022

The housing market has peaked in 2022? | Why housing markets pop

There are a lot of people who aren’t ready to hear what I am about to say.

I feel like a lot of you are just in an emotional place that doesn’t allow you to listen.

Sometimes when you listen, especially during times of heightened emotions, you come in with preconceived ideas and some definitions of what you think the reality is, and you reject everything else that doesn’t fit those ideas.

Let’s try throwing all those preconceived ideas out the window for a second, and talk about the housing crash, the bubble, and its definitions with fresh eyes free from fear. Let’s look at statistics together and try to formulate more rational speculations.

And if you still have questions, feel free to hit me up on my socials. I love hearing your opinions, especially when they differ from mine, because it challenges me and allows me to see things from different perspectives.

With that said, let’s dive right into it.

The housing market has peaked, but it won’t pop just yet.

This is an article from The Atlantic titled “The U.S. Housing Market Has Peaked.” Its subheading is worth noting though, it says, “But no, we’re not headed for anything even close to 2008.”

The Atlantic says, “[...] the vibe is shifting. I count at least three signs that the national housing market is about to experience a significant slowdown.”

Let’s go over those three signs.

“First, as the Federal Reserve raises interest rates to combat inflation, mortgage rates are soaring. In April, the 30-year fixed-rate surpassed 5 percent for the first time in more than a decade. As borrowing becomes more expensive, so does buying,” says The Atlantic.

We’ve seen that [the raised rates]. They are at about 5.5%. But, all things considered over the last 40 years, the interest rate being at 5.5% is actually pretty amazing. It’s still pretty cheap.

“Second, the number of homes for sale—a.k.a. housing inventory—is finally perking up after plunging to all-time lows during the pandemic,” says The Atlantic. They also say that inventory might be the single most important statistic to watch.

The Atlantic quotes Bill McBride, a real estate and economics writer. He says, “My view has been that the market shift will show up first in inventory, [because] as inventory increases, house-price growth will slow.”

That totally makes sense, [if you brush up on your law of supply and demand], right?

If you don’t know who Bill McBride is, “In 2006, McBride famously called America’s housing bubble when he saw inventory skyrocketing to absurd highs,” according to The Atlantic.

For those of you who wonder why the Fed is raising rates to combat inflation, you can blame Paul Volcker. He’s the guy that came up with the idea in the early 80s.

The Atlantic says, “To combat high inflation from the 1970s, Fed Chair Paul Volcker hiked up interest rates, jolting the economy into a deep recession. The housing market basically stalled until 1982.”

This leads us to the third sign.

According to the article, “Finally, we can already see these technical statistics—rates, percents, inventory—playing out in the real world. Google searches for homes for sale are falling in major cities, including Boston and Los Angeles. Redfin agents in California say that showings and offers are down by double digits since last year. In Minneapolis, showings have fallen rapidly in just the past month.”

I have one of the largest communities of real estate agents. We have more than 150,000 in the Facebook community, not including the hundreds of thousands more outside that community. We talk to a lot of agents, and we are seeing a little bit of a slowdown when it comes to multiple offers as well. It’s all in different areas—it’s very regional.

The Atlantic ends the article with this, “Things won’t feel great for everyone. But historically speaking, they just might feel normal.”

What makes a housing bubble pop?

I started asking questions of myself and some of my friends: What are some of the leading indicators of an actual bubble?

That led me to this article by Investopedia, titled “Why Housing Market Bubbles Pop.”

According to Investopedia, “housing markets do sometimes go through periods of irrational exuberance and see prices rise rapidly before falling back in line.”

Historically speaking, the housing market isn’t as easily affected by pricing bubbles compared to other asset classes. That’s why it is a big deal when a housing bubble does occur.

A lot of people are calling the current market situation a bubble because some aspects of it look like a bubble. But it still hasn’t quite checked all the indicators to be called a bubble.

So what is a housing bubble?

Investopedia says, “[Housing bubbles] generally begin with a jump in housing demand, despite a limited amount of inventory available. Demand further increases when speculators enter the market, making the bubble bigger as they snap up investment properties and fixer-upper flips. With limited supply and so much new demand, prices naturally rise.”

Imagine a balloon being filled with air. If the air pressure inside is too much for the balloon’s membrane to bear, it pops.

The same thing happens to the housing market. If the demand for houses is too large, and the inventory is limited, it drives the prices so high, then something breaks.

“Housing bubbles have a direct impact on the real estate industry, but also on homeowners and their personal finances,” the article continues. “Some may even have to dig deeper into their pockets, using savings and retirement funds just to keep their homes. Others will go bankrupt and foreclose.”

During the housing bubble of 2007 and 2008, a lot of the people who were purchasing homes were buying them with mortgages that have variable interests. They would change a year, three years from the date of purchase. And as interest rates were rising, their payments would rise.

But that’s not what we are seeing right now.

So what causes a housing bubble?

According to Investopedia, “The price of housing, like the price of any good or service in a free market, is driven by the law of supply and demand.”

“Once it is established that an above-average rise in housing prices is initially driven by a demand shock, we must ask what the causes of that increase in demand are,” the article says.

Investopedia listed several possibilities that increase demand, and I broke them into two categories: what is not true of the current market, and what we are observing right now in the current market.

Not true of the current market:

(Bulleted points are excerpts from Investopedia.)

These two things didn’t happen. In some cases, we see some FHA guidelines being lowered, raising the debt-to-income ratio higher than normal. So, keep an eye on FHA loans because if they start to default and go up, depending on where the economy is, that could be a concern.

Thankfully, we also haven’t seen excessive risk in the current market.

Observed in the current market:

(Bulleted points are excerpts from Investopedia.)

What happened during the pandemic was that the government threw money to fix things, so now we are having inflation.

Yes, we saw people leave certain areas, and in some cases, we saw people buy homes for the first time. But, it is undeniable that there was a movement [migration].

I’m in LA, and a lot of people left our area and went to different places, like Boise (which now has higher inflation). People from Seattle left for Phoenix, while people from New York went down to Florida. 

We’ve seen an increase in LLCs coming in and purchasing properties en masse. Goldman Sachs bought 80 homes in March, and Jeff Bezos’s company, Arrived, opened investment opportunities for non-accredited investors to own a piece of single-family homes, or “trophy properties.”

We are already seeing fixes and flips, but we are also seeing investors coming in and taking a big chunk. In fact, according to NAR, in the first quarter of 2022, 18% of all purchases were by investors, and 30% of purchases were made in cash.

Closing thoughts

Right now, everything is changing on a day-to-day basis.

We saw Target and Walmart come back with dismal results as far as their economy as companies, because of supply chain disruptions, and their market cannot afford their bigger ticket items.

Pay attention to the details, because what happens over the next year will all be because of these little nuances you may or may not have seen or noticed.

And right now, it isn’t a crash.

Could it change? Of course.

Our economy could possibly tank tomorrow for any reason (as what happened with the pandemic, and the Ukraine-Russia war).

But as of now, we’re fine.

And remember, all of this (as Bill McBride said) relies on supply and demand.