What’s going to happen to the housing market? Is it going to crash? That’s a huge question as so many people are wondering how long price growth can continue. Let’s talk about this today by focusing on some of the bigger topics in this conversation. Spoiler alert. This isn’t a YES or NO sort of post. Any thoughts?
Background noise: Just in case you need some background noise today, here is a YouTube Live I did with Jason Walter (90 minutes).
THINGS TO CONSIDER ABOUT TODAY’S HOUSING MARKET:
Doom narratives: Some people gravitate toward dark housing narratives and here are some headlines I’ve heard in recent years:
- The pandemic will cause the housing market to implode
- Forbearance will crash the market
- The end of the eviction moratorium will be the death-blow to housing
- A foreclosure tsunami is on the horizon
- The end of single family zoning will destroy residential real estate
- The demise of Evergrande in China will bring down the world
- Zillow exiting the market signals the top
- What else?
Rosy narratives: In contrast some people embrace a positive-only housing narrative. Instead of looking at stats, it’s like everything feels ultra special like riding a unicorn on a rainbow (I guess that would be nice?). So even saying a word like “slowing” or “cooling” to describe the market seems sinful. But let’s be real. This is just as bad as doom and gloom because it imposes a narrative rather than looking to stats to tell the story of what is happening.
Confusing slowing with crashing: Right now the market is slowing for the fall season and my observation is some people are confusing this with the market crashing. My advice? It’s important to know how the numbers usually dip during a fall season so you can spot if anything truly is abnormal. Let the stats form your perception of trends.
Market cycles: Markets go up and they go down. That’s just what they do, so at some point we would expect to see prices no longer rise. We are on the cusp of entering our eleventh year of price growth in Sacramento and it’s hard to imagine that would continue forever because nothing always goes up. Not bitcoin. Not stocks. Not NFTs. Not baseball cards or beanie babies. Here is a blog post I wrote two years ago to discuss the myth of the seven year rule in real estate. In short, the market does NOT have to change every seven years. Yet we have tended to see somewhat of a cycle in California lately where we have 7-10 years of price growth and then years of decline. So on paper we are due at some point for a change. Keep reading though.
Timing the market perfectly: Everyone wants to sell at the top and buy at the bottom, but pulling that off is easier said than done. In fact, most of the time when I ask people if they bought on purpose in 2012 at the bottom they say, “No, I just got lucky.” This reminds us timing the market isn’t as easy as it sounds. Remember, when a market bottoms out not everyone can afford lower prices because maybe they don’t have a good financial situation to be approved for a loan. This was a huge problem in 2012 where so many people had gone through a foreclosure or short sale and simply were not able to get a loan despite low prices. In short, just because prices are low doesn’t mean your lifestyle will line up perfectly for that moment.
Not the new template: What happened last time in 2007 isn’t the new template for every future market correction. It’s easy to think there is some sort of market formula, but the implosion we saw back then isn’t all of the sudden what every future change now has to look like. Even history speaks to this. In my area in the 1990s prices dipped by about 15% while during the most recent down cycle they dropped by nearly 60% (median price in Sacramento County).
Not tied to the last price peak: When we get back to the price peak, the market will collapse. I hear things like that and it’s just not true. Let’s take a drive through local history. In the early 2000s the market in my area was already back to the previous price peak from the 1990s, but the market didn’t have to turn because it got back to that level. No, it actually kept going for another three years despite surpassing the price peak.
Not tied to inflation-adjusted prices: In my mind it doesn’t matter either if we are back to inflation-adjusted prices. Again, the market isn’t tied to whatever happened in the past and current buyers aren’t making decisions based on whether we are back or not to inflation-adjusted prices from fifteen years ago. Of course these days some buyers are likely to park money in real estate as a hedge against inflation, but that’s a totally different thing with buyers choosing to buy or not based on inflation-adjusted price stats from years ago.
False prophets and broken crystal balls: Lots of people make housing predictions and when their predictions don’t come true they punt their predictions down the road until one day they’ll be correct. I can already see the social media flex where someone says, “Bro, I called the market.” Well, maybe that is technically true, but what you actually did was lose credibility over many years before you were eventually right. While we can have ideas about the future, at some point let’s concede nobody really knows exactly what is going to happen.
Unsustainable appreciation: We’ve seen massive price appreciation in recent years and this is not sustainable. In other words, the housing market cannot keep growing at such a rapid pace without simultaneous wage growth, economic growth, or some other stimulus to fuel higher prices. This pandemic market has been quite unexpected because for years we were seeing price growth legitimately slow down (see visual below). But then growth sped up. Way up.
Selling and renting: I talked with an owner who wanted to sell his house before the market crashed and then rent until prices stopped going down. I get the sentiment and this guy should do whatever he wants (no pressure from me). But I reminded the owner that during the previous two price cycles the market declined for six or so years before starting to go up again. So the question became, how long do you plan to rent? This is a very practical question and I think sometimes people are so fixated on a coming crash that they’re not thinking through logistics like this. Moreover, it’s not just about prices because lifestyle is often the trump card for buying and selling (see below).
Super tight underwriting: I’m not sugarcoating anything here, but I will say this past market cycle has been characterized by very tight underwriting and buyers actually being able to afford what they purchased. Check out how different FICO scores are in the past few years compared with previous years. This doesn’t mean the market is perfect right now, but it does mean we don’t have the same situation we had last time around either. Of course these past two years home prices went way beyond what anyone predicted and this type of growth feels unhealthy. But at least buyers are being scrutinized instead of only having to fog a mirror.
Bro, it’s a generational thing: We’ve had the largest generation come of age and they are hungry for housing. This is a big deal because Millennials are a huge force in the market right now. But I think we need to be careful not to pin the glowing housing trend on them alone. In my mind the danger of this narrative is it minimizes the power mortgage rates around 3% have played in creating excessive demand. Moreover, it also minimizes fewer listings hitting the market due to sellers not listing during the pandemic. Again, I get the shift in demographics and this is a real thing. But let’s not downplay other factors too.
Lifestyle matters: At times we treat buying or selling a house like it’s some sort of mechanical thing that’s only about price cycles. I get it, but let’s not forget houses are shelter and most of the time people buy and sell shelter based on their lifestyle mandating change. It’s about getting into a larger or smaller home. Or maybe buying is about trying to get the kids into a certain school district. Or maybe there is a job change or a relationship change. Or maybe it’s time to leave California (or come back). There are so many reasons why people make real estate decisions and all I’m saying is lifestyle tends to be the big motivator rather than prices alone. Of course having massive equity can help propel these decisions too. Again, I’m not trying to talk anyone into anything. Buy or don’t buy. Sell or don’t sell. That’s up to you alone. Just don’t get trapped into thinking it’s only about prices. In other words, don’t underestimate the importance of your lifestyle and family situation as you consider making real estate decisions.
Riding down the market: If the market did crash, which neighborhood do you want to ride down the market in? This is a relevant question that I heard first from Realtor Mike Gobbi. Remember, the equity in our homes means very little unless we are taking money out or selling.
I know, I didn’t answer the question: I realize I didn’t answer the question in the blog title. What is the market going to do? Well, to be coy, it’s going to keep moving and changing. And at some point it won’t go up any longer. Sorry, I know I’m being vague. Seriously though, what is it going to do over the next two years? To be coy again, I’ll tell you in two years… On a sincere note, nobody knows the exact future. Case-in-point. I don’t think anyone predicted the housing market we ended up having in 2020 and 2021.
Mom jeans vs skinny jeans: Anyway, my goal here is to keep unpacking local trends to put perspective in your hands that is fueled by data and logic. Let’s keep watching, imagining the future, and of course being humble about ability to predict. But if you really are into predicting, tell me this. What is going to be more popular next year? Mom jeans or skinny jeans? If we can get to the bottom of that, then let’s tackle housing trends.
Thanks for being here.
Questions: What stands out to you the most? Which topic resonates with you? What did I miss?
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I love this article and am continually astonished at those that say we are going to go back to 2006! Totally different circumstances and I appreciate you noting that!
Mom jeans all the way!
Thanks Paula. I always appreciate your take. I think housing cycles are like kids. They won’t all grow and change the same way. It would be a real mistake if I expected my youngest son and oldest son to experience high school in the same exact way. Maybe. Maybe not. Okay, I’m not sure if this word picture works, but I think there is something there.
Folks, Paula says mom jeans. Care to weigh in on that? 🙂
No more jeans! Yoga pants all day!
Haha. Perfect comment. There’s always that option. And speaking of yoga pants, I watched the LuLaRoe documentary series recently and I recommend it (just in case anyone is coming to this blog for stats & recommendations). 🙂
Imagine the feds trying to tax unrealized appreciation. That better die as a policy. When my house is ‘under water’, will I get a tax refund? I wager ‘no’.
What goes unspoken is the effect of really bad policy from those who haven’t earned real revenues or written a paycheck.
Thanks Jay. I appreciate your take as always.
Ryan – – art Gaudette Phoenix here
per core logic Phoenix is the highest appreciating city this last year in United States had 31% appreciation.
Going back to the great recession time at the beginning of that. And say 2005 6 and 7 – Phoenix again for a while had the highest appreciation and United States of America. That was in the period between roughly September 2004 through October 2005. During that period Metropolitan Phoenix had the highest appreciation in United States. Appreciation was from 43% to 52% during the period of time.
I am an expert on the subject as I had a friend who I probably told you about before, who was having trouble with the Arizona appraisal board and their appraisals. In defending my friend I had to establish this information as to the exactness of appreciation in Metropolitan Phoenix from roughly 2004 through 2007. This is how I exactly know what happened in that time frame and why Phoenix was for a while having the highest appreciation and United States of America.
Remember in those days people could get easy money – – government loan money to buy a property where they were putting orderly anything down. So people would buy properties waveform depreciate go fast and then sell them. When things went bad since people didn’t lose much I simply walked away from their properties they had bought
so comparing these 2 time frames in Phoenix were Phoenix was the fastest appreciating city in real estate in United States the timeframe of 2004 5 and 6 was probably about 15% faster appreciation than what we are having now.
Also the properties that are being bought are significantly being bought under different conditions now then and 2005 6 and 7. In those days it was easy money because you can get along really is. Nowadays it’s not true you usually have an awful lot of your own money put into the project are your paying cash like so many people are there currently in 2021.
Since people are paying cash and also putting down heavy percents of down payment – – people have skin in the game this time. And the big difference that makes is a lot more credible appreciation time is not factoring there – – it’s called skin in the game with a person has to worry a lot about their own pocketbook as to what’s going to happen.
I hope this comparison might be of interest to you Ryan – – Art Gaudette
Thank you Art. I appreciate your details here. Thanks for taking the time to tell your story.
Yeah, this market is so different in terms of financing and that’s a huge layer to consider. Also, one other thing worth noting is the lack of rampant speculation. I recall people back then were buying properties in order to very quickly flip them simply because the market was increasing rapidly. I saw this with new construction especially where buyers would sign a contract for a house, it might take 6+ months to build, and then the house would be sold for significantly more right after the buyer got the keys. This type of activity still exists on some level, but it’s not rampant. With that said, it’s unlikely today to hear about a hair dresser with a huge real estate portfolio (nothing wrong with hair dressers of course). It’s like people say, be concerned when your hair stylists has five financed properties on a limited income… 🙂
All that said, then and now is simply different. That doesn’t mean there aren’t red flags now. It’s just such a different market and it’s good to consider that rather than automatically project what happened last time on today due to price similarity today.
Thankfully we don’t have the ticking time-bomb of adjustable rate mortgages too. It’s hard to believe how much fraud was happening in the marketplace then.
Hey Ryan,
You lightly touched on the significance of today’s mortgage rates, but I think it’s helpful to see a real example.
Looking at your inflation adjusted chart, the median price in Sacramento peaked around 2005 at around $525,000. If someone made a 20% down payment and got a 30 year fixed mortgage at 6%, the monthly payment was $2518.
A similarly priced house today with the same mortgage but at 3% would have a monthly payment of only $1770!
These numbers don’t include things like taxes and insurance, but you can still see the huge impact these low rates have on home affordability!
Thanks Dave. And that’s a great layer to consider for why it can be so off-base to compare then vs now. Reaching a similar level to then doesn’t necessary mean the same thing for a person’s wallet today. Affordability is really a snapshot in time based on today. That’s what matters most. Let’s follow jobs, the economy, and whether buyers are pumping the brakes or pulling the trigger. So far sales volume has been more or less normal lately, so despite the narrative of buyers struggling, clearly the market is still pulling the trigger as a whole (I realize some individuals are priced out).
Of course this is a double-edged sword because low rates help with affordability, but they have also helped create excessive demand. What I mean is rates this low have been a steroid for prices to increase. So yes, they create affordability, but they also help inflate prices.
As always, great contribution Ryan! Thank you! Could not agree more that it is super important to use caution when answering the question “do you think we are heading for a crash?” Leaning into the stats is crucial. Some more balance to our market would be nice and, dare I say, I personally would welcome more inventory and a bit less madness.
Again, thank you for being a reliable source of information!
Adriana
Thank you Adriana. I appreciate the kind words. There is nothing wrong with balance. It’s been forever since we’ve had a balanced market, but having slightly more normalcy is definitely welcome. I’ve yet to hear anyone frustrated over that. I think it’s a good on so many levels. It shouldn’t be this lopsided to buy a home (shelter).
The Lifestyles section resonated very much. At different points in one’s life, one may consider different kinds and sizes of housing. Various factors drive this as you covered. Sometimes it’s age, young or old. Sometimes it’s a revised outlook or mindset and that too can fluctuate like markets. It can also be thinking about how much housing do we want vs. need and how to finance that and the rest of life activities accordingly.
One thing I do obtain in reading your tweets and blog is practice with the line of “what can we control about housing and what we can’t.”
Thank you Glenn. Very well stated. I think you are 100% correct about needs and wants. Two story vs one story. Modern and trendy vs 55+ retirement community. Etc… I love your last line too. There is really so little we can actually control in life. That’s the truth of it.
Thanks Ryan- I’m going with Generational thing… well, and interest rates. My loan guy just informed me that ‘stated-income’ is back too! The Fed-Taper will calm things down I think, maybe… Next spring will be interesting. I am already seeing more ‘foreclosure’ activity, but I bet that is more about situation and job loss than it is about forbearance. Keep up the great work!
Thanks Brad. Please keep me posted if you see anything interesting. I’d be curious to see what sort of standards exist for underwriting stated income. I would expect for more than fogging a mirror because of how stringent lending has been. But I’m not on that side of things, so I’d defer to anyone who wishes to speak into that.
I do concur that some of this is generational. Clearly it is. Here’s my point of contention though. The market was slowing down as I showed in a visual above. We were literally seeing price growth slow before the pandemic for many years in a row. Then the market completely took off in a different direction after the pandemic. Well, technically before the pandemic rates started to go much lower and it was already hot. All that said, what I didn’t mention above is many graphs around the country look just like mine with price growth slowing and then speeding up.
Ultimately I think slowing down and then speeding up so dramatically can’t all be chalked up to generational stuff because mortgage rates have been a huge engine for the market. In other words, rates are a significant driver. I could be wrong of course, but my observation was as soon as rates went below 3% the market seemed to hit an inflection point where it really got crazy. So based on experience through this pandemic and observation of data over time with slowing and the speeding up, it just seems there is more going on here than only demographics.
I’ve noticed Ivy Zelman speaking more lately about stuff like this and I’m glad she is because I think a healthy dose of remembering 2018 is a good idea. As we might remember 2018 got really dark and lots of people thought the market was going to tank at the time. It’s amazing what happened when rates shot up to 4.5% and higher in a very short period of time. Volume started to slide and the sentiment in the trenches really changed. Thus I think very recent history reminds us how sensitive the market is to rate changes and how meaningful low rates have become to the market. I realize of course mortgage rates have basically declined for forty years, but below 3% has been historical and it just seemed to create chaos as the number of listings was split in half too. In short, it was an unfortunate perfect storm to foster a truly lopsided market. And yes, generational trends are a part of that too. I just think we can’t underestimate the supply problem further magnified during the pandemic and the demand problem.
Anyway, time will tell. We’ll have more data at some point and I’ll be first in line to change my narrative if needed. But if rates do rise like some rate prophets are predicting, we’ll all have a front row seat to the trend in coming time. Then we’ll know more about how demographics and rates interact and which was is more powerful than the other… This will be really fascinating to watch.
I love that you took the time to inflation adjust the median sales chart. Great work and very interesting. Skinny jeans are always going to outperform mom jeans. I’ve got my skinny jeans on now and I’m stocking up on everything skinny I can get. With all the mom jeans stuck on the shelves at Christmas and the skinny jeans stuck at the ports, I will be making a fortune this holiday season. If you would like to invest, let me know.
Epic comment. I’ll invest only if you let me pay in Doge. Or Bitcoin. 🙂
You know, the inflation adjusted chart helps show market cycles over time in a more pronounced way. I really dig it for that reason. Some people wish I would adjust every stat I share for inflation, but I’m not going to go there. But that’s another story. 🙂
Hi Ryan, my 25 cents (got long winded and changed from 2 cents to 25 cents). Watch the 10 year treasury. If it gets above 1.75% ( I can’t believe I am saying that number with a straight face) and it holds for a couple of weeks, then starts to trend up. There will be some collateral damage, more to psyche then the RE market in general. What I am more concerned about is there are homeowners out there getting adjustable rate mortgages. I know yea doesn’t make sense but it is happening. As to stated income comments above, yes I have spoken with mortgage brokers on that topic but doesn’t appear to be the 2005/2006 insanity. Plus we also don’t have Countrywide at 125% financing either. Now how is that for a name from the past. I am concerned about this market, not that it will crash tomorrow, 2022 or 2023, but what the Fed and Congress might try to do. Their ability to pull a rabbit out their hat is not good and I foresee some potential issues, if the Fed over reacts or doesn’t react at all, Hence Mr. Greenspan and Volker. My last concern is inflation, which all of the talking heads keep saying is transitory. Well I looked up Transitory and it says a “Short Period of Time”. I am curious what is their definition of Short. Right now Gas hit over $5/gallon, food costs, clothing, cars, trucks and just about everything else is increasing like the last 18 months of RE. This gives me pause and when everyone tells me not to be concerned prices will go down, I get a little suspicious. I think all of these factors will be apart to the issue going forward with RE. Like it or not your stats will give you a good indicator, but I am just a tad bit concerned that someone taller, allegedly better looking than me and allegedly smarter than me is going to make some bonehead decisions that will impact the RE market in ways we haven’t seen. I take you back to the bright and brilliance of Mortgage Back Securities and rating services that couldn’t tell a AAA+ from a DDD+, other than my report card in my freshman year of college. Thanks my friend I am worn out and tired from riding horses, roping and sorting for the last week. That world makes a lot more sense than RE does right now. Be safe and take good care.
Love the commentary Brad and I’m so glad you made it back alive from your City Slickers trip. I’m kidding of course. That would be me. You are the real deal. I share your concerns about governmental involvement and evolving lending guidelines too. I sure hope this is a temporary thing because we need people to be able to pay for groceries and afford the essentials.
Awesome article as always, Ryan! Thanks for sharing!!!
Thank you so much DeeDee.
Good article, but i think an overlooked aspect of this is that while rates are low and credit scores are high and income is good… These don’t terribly matter long term when buying a very very expensive house. A house bought at a low interest rate can’t resell to the same income of buyer at the same price if rates rise. The monthly payment will be higher, and the same income of buyer will struggle that much more to cover it. Price has to drop or the new person’s buying power has to be higher to handle that same house value but increased interest rates. Given the notable income of most actual buyers right now… That’s a tall order and would reduce buyer to seller ratios. This also doesn’t even include house appreciation. That, devoid of interest rates, again requires a higher income of buyer. The two together simply couldn’t exist.
These houses are a big risk as well as the mortgage payment on them last year began to vastly exceeds what the rental market could support. When you can’t rent every room in the house and afford to even live in a tent in the back yard on a median income job…you’ve got risk. First blip in the job market or person’s employment and it can’t go anywhere but to foreclosure or short sale. The entire market long ago surpassed that risk.
Have a kid with special needs and want to move out of the country to where they have specialized help for them? You can’t rent if you bought high. Can’t sell either if mortgage rates drop. Tada you’ve got a house that’s a liability, not an asset! This is a real story of a foreclosure from my neighborhood in 2007.
All that risk… If something does come up, it won’t take much of that something to upset the market.
We’ve got the same ingredients in the same temperature oven. We’d be insane to not expect a different cake.
Thanks Jesse. I appreciate your take and I hear what you are saying. I suppose the issue you presented is a struggle in any rising real estate market. There is always risk in real estate and this would likely be a hurdle in any rising market, right? One of the struggles here for lots of people is how quickly prices have changed. I would say getting a house at a low rate does matter though in terms of locking in a doable monthly mortgage payment. If the payment is affordable, that’s the key. The problem of course is when prices rise so much that payment can start to be a real stretch. So if people have a really thin margin to make things work, then that’s a huge issue and it can be a giant risk. That’s a sad story with your neighbor. I think it reminds us it’s not easy to make things work these days. Granted, 2007 was an insane avalanche of a housing market and economy. I hope we don’t get a repeat of something that severe.
As a new Realtor in the area I really appreciate your down-to-earth and easy to understand posts. There is always something in them that helps me in my real estate conversations 🙂
Thank you Wendy. That’s a huge compliment and I appreciate it. Feel free to reach out any time also to ask questions or share insight.
Great stuff, Ryan, thanks!
Thank you so much Paul.