Pay attention to the local housing markets this Fall of 2022 because there are three things that are extremely important. Also, I want to emphasize that no, what I’m seeing is that there is no crash. Is there a housing correction? Yes. There is a difference between a crash and a correction, so pay attention, because there are a lot of people out there that are there to scare you to sell you other things.
I got this from a great article by Fortune magazine. Note the words that people use, and pay attention to who is using these words. Fortune calls it a housing market downturn, not a crash. I believe they got it right, and remember, nobody really knows what is going to happen—the Fed doesn’t even know. So, direct your attention to the local markets, and see what’s actually happening there.
Back in June, Fed Chair Jerome Powell made it clear: The housing market would go through a “reset.”
“I’d say if you are a homebuyer, somebody or a young person looking to buy a home, you need a bit of a reset. We need to get back to a place where supply and demand are back together and where inflation is down low again and mortgage rates are low again,” Powell told reporters. (Source: Fortune)
The mortgage rates are not low. Obviously, we’ve seen that. And I have a feeling that the Fed really wants to crush the real estate market. But the market is on the other side saying, “Hold up, we got this. We’re not going to go down.” So, it is very interesting to watch what’s happening with the FED.
At the end of the day, they are saying, “We don’t want the real estate market to crash,” but damn, if they keep on doing these things, it might. So keep an eye out. Right now, we’re not heading for a crash, from what we see—it’s too early to tell.
Let’s dive right into the three things we should look out for this fall, according to Fortune.
Fortune shows a map of the 98 major regional housing markets where home prices have already fallen since their peak. I am an agent based in Ventura County, and seeing this data from John Burns Real Estate Consulting is quite concerning. Because, according to this, several regional markets in California are shifting their prices down from 0.2% to 8.2% (from the peak).
However, these numbers aren’t taking into consideration one key factor, which we will touch on later: housing supply. That’s why I think, despite the housing correction, this doesn’t indicate a housing crash.
Moreover, according to Fortune, “A growing chorus of research firms—including Moody's Analytics, John Burns Real Estate Consulting, Zonda, and Zelman & Associates—expect this home price correction to continue into 2023. Peak-to-trough, Moody's Analytics thinks U.S. home prices could soon fall 5%. Moody's Analytics thinks that prices could drop by 5% to 10% in significantly "overvalued" housing markets. If a recession manifests, Moody's Analytics predicts those price drops would double. But even in that scenario, home prices would still be below the peak-to-trough U.S. home price decline of 27% we saw between 2006 and 2012.”
I think this is important because we need to pay attention to the things that the housing market touches on the economic side. What is actually affected when it comes to real estate?
Goldman Sachs is forecasting that 2022 to 2023, according to Fortune, will have lower numbers.
This is what the article says:
Researchers at Goldman Sachs recently released a paper titled “The Housing Downturn: Further to Fall.” The investment bank forecasts that U.S. housing GDP will drop by 8.9% in 2022 and another 9.2% in 2023. In the lead-up to the Great Recession—which officially started in December 2007—housing GDP fell by 7.4% in 2006 and 21.4% in 2007. (Source: Fortune)
If you look at the drops in the numbers, we are not even close to what happened back in the Great Recession that began in 2007.
Now, let's take a look at the things that real estate touches on the economic side. Fortune says, “As home shoppers across the country put their home search on pause, it causes homebuilders to pull back. That sees decreased demand for things like refrigerators, lumber, windows, and paint. Those economic contractions should, in theory, help to rein in runaway inflation.”
Seeing this, now we can understand why the Fed keeps on wanting to press the prices to go down and “reset.” They don’t want a full-on crash, but they are saying “Let’s reset it.”
This is the key factor I mentioned earlier. According to the data from Realtor.com, the monthly changes in active listings on their portal have gone down dramatically (from 128.2k in July 2022 to 31.9k in August).
This is a strong indicator that the market is neutralizing, not crashing.
According to Fortune, “As the Pandemic Housing Boom fizzled out this summer, we saw inventory jump across the country. In bubbly markets, like Austin and Boise, that inventory jump was greater than 300% between March and August.... But that inventory spike is already fizzling out.”
Yet, I don’t hear anybody talking about it. You hear a lot of these people calling it a crash, yet nobody’s talking about the inventory or the fact that sellers might grow more reluctant to put their homes on the market, which is a massive factor.
“Active listings on Realtor.com jumped by 106,900 homes in May. That was followed by 102,900 and 128,200 jumps in June and July. However, that slowed in August to just a 31,900 inventory jump. And through the rest of the year, Altos Research predicts inventory will actually fall,” Fortune adds.
Pay attention to the data. This is a leading indicator of where we are going. If this continues, what happens? Fortune also answers this for us.
What's going on? For starters, sellers are realizing that buyers are done paying top dollar. Rather than take less, some sellers are simply waiting out the housing downturn.
There's also the rate lock-in effect. The vast majority of outstanding mortgages have rates below 5%—with a big chunk even below 3%. If they sell now, they'd be giving up their historically low mortgage rate. That payment jump is hardly appealing for move-up buyers.
"It's going to be very very hard to persuade people to let go of those insanely low rates," Palacios tells Fortune. While many industry insiders believe tight inventory will help to prevent a housing crash, Palacios says it won't be enough to prevent the home price correction.
Note that they used the word "correction" again, not "crash." It is all in semantics. The words we use matter.
If this continues to happen, where fewer and fewer sellers are putting their homes on the market, and the builders are pulling back, even with the softening demand from buyers, a crash isn’t happening. Why? Because there are no homes for sale. The supply is not enough. Will there be a correction? Yes. We are already seeing it. But a crash? I don’t see it happening anytime soon.
Don’t just freak out when you hear people say “the housing market is crashing.” If you need to buy now, buy. If you need to sell now, go ahead and sell. If you want to wait and see where things go in the next few months, that is okay too.
Read the data, don’t just take what alarmists say at face value. Always go back to the data and consider things such as what is normal regarding seasonal inventory. And remember that real estate is regional. Pay attention to what is happening in local markets on a daily basis.