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?