What’s the latest on the housing market? There are some conflicting views, as always. I’ve got Ray Dalio showing us what could possibly happen, and then there’s Suze Orman on the other side, telling us something else. Then there’s the media, who just love to clickbait all of us. But that’s just part of the world we live in.
Let’s dive right into it.
The biggest issue right now is affordability. As long as the interest rates for mortgages keep on creeping up, there is a chance of the housing market facing actual danger. The current statistics show us we’re not there yet, but that doesn’t mean we can’t be.
I try to look on the positive side of things more than the negative, but as much as I want to tell you that everything is going to be okay, I can’t know for sure what the future holds. All I can tell you is where we are right now, by showing you the evidence.
There’s a video I came across with Suze Orman in it, and she says “the tables have turned” slightly in favor of the buyers. She doesn’t think homes will go down in value by a lot because real estate does pretty well during a recession if you look at history.
According to CoreLogic, a recession doesn’t equal a housing crisis. In fact, in the last six recessions, housing has gone up in value from around 3.5% to 6.6%. The exceptions are the recessions during the 90s and the great 2008 housing crash.
Suze continues, saying, “We are used to 17% to 30% gains over the past two or three years in real estate. I think if you own real estate, you’re not going to see it go down dramatically. Maybe you’ll see it go up only 5% to 7% a year. What will change, however, is the anxiety of buyers, because now they are going to have time.”
And I agree that that's probably what’s going to happen. As long as interest rates don’t go up dramatically, people are going to stay put.
Look at me, as an example. I own a home. I own multiple homes, and the one I own where I live, I’m not going to sell to buy something else with an interest rate of 6% or higher. I’m at a 2.9% mortgage rate.
If we think of it logically, many people aren’t going to sell because of that as well. So, there is going to be less inventory there.
Renters are probably not going to remain as renters because have you seen the prices for rent? It’s insane. Just Google those prices. So if you thought those prices were going down, they’re not.
All that this means is that there are going to be fewer homes on the market overall. We’re talking about all this demand that’s there, that’s pent up, and now, all of a sudden, we’re starting to ease up. But what we’re not talking about is the possibility that these potential future sellers will never show up.
And what about all of those homes that were bought up by these big companies to flip and do short-term rentals? Chances are those are never going back on sale either.
So, these are the reasons why I say I don’t know what’s going to happen. We have to keep an eye on what is actually occurring—this is the reality that we’re in.
Ray Dalio wrote an article on LinkedIn saying Reducing Inflation Will Come at a Great Cost: Stagflation.
In the article, Ray talks about how the Fed is stupid—they’re all idiots is practically what he says, but that is a loose paraphrasing.
In summary, my main points are that 1) there isn’t anything that the Fed can do to fight inflation without creating economic weakness, 2) with debt assets and liabilities as high as they are and projected to increase due to the government deficit, and the Fed also selling government debt, it is likely that private credit growth will have to contract, weakening the economy, and 3) over the long run the Fed will most likely chart a middle course that will take the form of stagflation. (Source: Ray Dalio, LinkedIn)
Basically, he says whatever we do, we’re heading to a place that’s not going to be good for the economy, and it is all the Fed’s fault. They could have gone a different way, but they didn’t.
Now, let's take a look at what the media is saying. Fortune is one of my favorite places to go to because they break it down really well. But that is just one media outlet, and look at what they say? These are some of their headlines:
You can keep scrolling, and this is the kind of news that we are reading, and it’s pretty negative. I am not seeing anything that’s giving us the opposite, so that we have some type of balance.
And take a look at this specific article: It looks a lot like a housing bubble. How your local housing market compares to 2007, as told by 4 interactive charts.
If you take a look at the interactive maps there, the first one is an analysis for the first quarter of 2022 that says, “The degree to which regional home prices are ‘overvalued’ or ‘undervalued’ in 2022, according to Moody's Analytics.” Bear in mind that Moody’s is a little more aggressive in its data analytics than most.
The areas that are deemed highly overvalued are the usual metros where a lot of people reportedly moved during the pandemic: Boise, ID; Austin, TX; different parts of Phoenix; Nashville, TN; and different parts of Florida as well. A lot of people online say Boise and Austin are leading in terms of being overvalued housing markets.
They compared it to the degree of overvaluation in regional areas in the same quarter of 2020. The same areas were already overvalued (albeit lower in percentage) two years ago, yet nobody was talking about foreclosures and a housing collapse at that time.
Then they compared it to the overvaluation of regional areas way back in the first quarter of 2007. Look at the map and understand what truly happened there and that real estate can be very regional.
Despite the housing crash in '08, it didn’t really hurt every single place in the US—a lot of it was the west coast, because we were overvalued then, and we were giving out all these loans to everyone. And then there’s the east coast. You might remember that it was California and Florida that suffered heavily back then.
Fortune also showed a graph of the overvaluation or undervaluation of 400 housing markets across the years (from 1993 to the present).
If you want current data, check out Altos Research. They update the stats there on a week-over-week basis.
And if we take a look at Boise’s statistics, the algorithm shows it is still a seller’s market. Median home pricing has gone up to $581,250, and the average days on market has gone up to 31 days, which coincides with the increase in mortgages. And take note of relisting, which is just at 6%. Because the more homes that re-list, the more homes are going to be on the market.
Some people are like, “Why am I going to re-list when the interest rates are so high, I just can’t afford what I was going to buy? It doesn’t make sense.”
These are the statistics you need to look at. What is the median rent price as well? (Up to $2,200 per month in Boise) Is it better to rent or to buy, or is it equal? If it is equal despite the interest rates being so high, maybe you should consider buying—because that means it is more worthwhile to own than to rent.
Now, here are some of the statistics I got from Mike Simonsen (Altos Research). And this data is updated as of June 20th. The inventory has gone up to 418,688. If it continues going up while the demand is cooling down, and we reach that equilibrium we’ve been talking about, what happens then?
Keep an eye on interest rates because that tells a lot about whether people can afford the market we’re heading into.
We also look at the median home list prices across the US, and this summer’s plateau is at $450,000. The new listing prices have gone up and down over the months, but they have slightly dipped to $425,000, and we still haven’t reached that point where we have less demand than inventory. Will we be? It could happen within the realm of possibility. But it doesn’t look like a crash.
Next, looking at the percentage of properties with recent price reductions, this year, price reductions are happening much faster than in previous years, and we know why it is being driven by the mortgage rates going up. Chances are high that we might see it surpass 37% sometime in August and slow down by the end of the year.
We really can’t say for sure what’s going to happen in the real estate market, but there’s been no crash so far. If things continue as they are now, interest rates should remain where they are at, unless something crazy happens and we don’t get a hold of inflation like we think we are.
But what I can tell you from the current data is that it doesn’t look like a crash because supply [is low] and demand is there. There are a bunch of differing opinions on the extremes of the spectrum. So keep an eye on the various leading indicators of the housing market.
Statistics on the immediate sales (in percent) of new single-family home listings all across the US show us that last July 2021, 35% of new homes immediately went into contracts as soon as they came out. This year, as of June 2022, we are at 22.7%, which is not that big of a drop year over year. This proves that the demand is there.
I think the determining factor of where the demand is going will really be the mortgage rates.
With the Fed raising rates to 0.75, mortgage rates will probably be around 6%. If, for any reason, something else happens and they go up by 1%, then at that point we might have to re-evaluate the housing market situation. There might be a bigger drop in some metros if that scenario happens.
Right now, it looks more like an evening out than a crash.
Try not to get carried away by fear, and look at the data, then try to derive your own conclusions based on hard evidence. Remember that there is an opportunity in any market—it is just how you look at it and where you are in your current situation.