housing market 2021

Is the market about to crash? How long can this keep up? What’s going to happen? Every week I’m getting questions like this, so let’s talk through some of the issues. This post has lots of topics that are coming up, so just skim to something that looks interesting. Anything to add?

The truth is nobody knows the future: Most predictions these days either say the market is going to keep increasing for 5-10 years or we’re poised to crash. But nobody knows the future. I know that’s not a popular answer, but it’s true.

Unsustainable: This market is really starting to feel irrational. We are seeing freakish price growth and illogical offers, which is why this does not feel sustainable. I’m not saying the market is going to crash because of this, but I am saying this type of rapid appreciation cannot keep up without simultaneous economic growth or some other stimulus. Last week I got asked about this in a live interview with Fox 40. Enjoy the discussion (see 4:41 for my answer).

It’s not easy to time the market perfectly (seriously): On paper it’s easy to time a real estate market, but it’s not so easy to pull off in the real world because finances and lifestyle don’t always line up perfectly with market conditions. In other words, most people buy when their lifestyle requires a change rather than finding a so-called perfect moment where prices bottom out. In fact, most of the time when I ask people if they bought on purpose in 2012 at the bottom they say, “Nope, I just got lucky.” This is not to pressure anyone to buy right now. I’m just saying it’s a good idea to get rid of “the market is so easy to time” myth and consider your lifestyle as well as prices.

False prophets: Be careful of some who are forecasting the market because they’ve been making false predictions for years and they keep repackaging their prophecies when the old ones don’t come true. By the way, here is a prophet test flow chart to find out if you’re a real estate prophet.

We’re back to peak prices, so we’re going to crash: I gave a presentation recently where I talked about nominal prices being back to 2005 levels in a certain area and someone interpreted that to mean we’re at the top and about to crash. Look, the median price in the entire Sacramento region is now almost 20% higher than it was at the previous top in 2005, so it would’ve popped long ago if there was something magical about getting back to that level. In short, don’t put your stock in “getting back to the top” as a predictor of future trends. And for economic nerds, I’m talking about the nominal price here (which market participants tend to fixate on), so please don’t open up the inflation conversation.

Not the new template: What happened during the last housing correction is not the new template for every future market change, so we cannot look to the previous crash and derive some sort of bubble formula.

I’m going to sell at the top and rent: I had a conversation recently with someone wanting to sell soon and rent until the market crashes. I get it because this person wants to pocket equity and avoid pain, but here’s a practical consideration. If the market did decline it could take years to do so. For instance, it took about 6.5 years for the last cycle to fully decline in Sacramento. Of course the bulk of the decline happened in the first three years. No matter what though, the viable question becomes how long are you going to rent for?

Fear of missing out: There is a palpable fear among some buyers about missing out on the market and not being able to afford in the future. If you’re in that boat I recommend having lots of conversations with people you trust and maybe don’t buy if you cannot make a decision based in confidence. In my experience buying anything based on fear doesn’t usually work out so well. 

The market was slowing and now it’s not: The market was slowing down for years and now it’s doing something completely different (unexpected). The thing is despite being in a global pandemic we’ve had artificially low inventory in light of COVID (less sellers listing their homes), more migration due to the ability to work from home, and shifts in what people want and need as a result of the pandemic. Oh, and mortgage rates dipped below 3% which has created truly excessive demand. It’s been the perfect storm to build what is likely the most competitive market we’ve seen.

Do you see how price growth was slowing until last year?

This upward price trek is happening in many places around the country. Here is a killer visual from Freddie Mac economist Len Kiefer:

A foreclosure wave is coming: There is talk about a coming wave of foreclosures in light of elevated forbearance rates. Here’s the thing. We don’t know for certain how forbearance is going to shake out because we’re still in the thick of this pandemic. Yet forbearance rates have been declining per the Mortgage Bankers Association and not everyone in forbearance is going to sell either (the stats literally show this). Moreover, the vast bulk of people in forbearance have equity to deploy (sell, refinance, etc…) instead of lose their home. I’m not sugar-coating anything and I’ll be the first to say there is uncertainty on the horizon in light of this. I do expect for some of these people to legitimately go into foreclosure, but at this present moment the stats don’t support a narrative of a massive wave of foreclosures materializing. We’ll see what happens of course, but this is what the stats are currently seeming to show.

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 Mike Gobbi. Remember, the equity in our homes means very little unless we are taking money out or selling.

Freakishly high price growth: We’ve had uncharacteristic price growth over the past year. The median price far outpaced where it should have theoretically gone. From my estimation it’s about $40,000 or 9% higher than it should theoretically be had we had a normal year last year (see visual). This could of course be the new normal, but no matter what I think we need to recognize the market is doing something right now that goes against a slowing trend we were experiencing in previous years as well as normal price growth.

The double-edged sword of appraisal waivers: We’ve seen so many more appraisal waivers this year. I get the necessity in light of appraisers being so backed up with a refinance boom and huge volume in the resale market, but what happens to prices over time with so many waivers? If some of these homes are essentially closing too high, does that help inflate the market? Of course let’s remember one sale doesn’t make or break a market, but if we start seeing lots of inflated sales that could certainly help speed up price appreciation. This is something to watch.

Market price cycles & the 7-year rule: Some people buy into the idea that the market changes every seven years, but that’s really not true because here we are in our tenth year of price growth (in Sacramento at least). But there is something to be said about real estate price cycles. Markets go up and they go down. That’s what they do. Bottom line. So at some point the most natural thing we can expect is for prices to go down. You know what wouldn’t be normal? If prices just kept rising forever…

Rates going up can help (eventually): The other day a Realtor friend said he thinks rates need to go up. You know we have a problem when real estate professionals start saying rates are too low. Just remember it’s possible we could see more buyers rush the market if they sense rates really are going to go up. The idea is to get in before they rise.

Look for price resistance: One of the things to watch is whether buyers are resisting prices. So far that is not happening. This doesn’t mean everyone can afford the market, but this month we’re likely to have our eighth month in a row of higher sales volume and pendings have been off the charts. In short, buyers are clearly pulling the trigger right now and we are not seeing resistance when it comes to playing the market.

Dude, this is so obviously a bubble: I get the sentiment. But remember, one of the ways we know something is a bubble is if it actually pops. Freddie Mac had a great article referencing this point years ago.

But inventory is low: There is the notion that inventory is low, so prices cannot decline. That’s a reasonable idea, but it’s only true until it’s not true. If 2020 taught us anything it’s that sometimes dynamics shift, so let’s be open to the idea of the market not having to behave a certain way despite low inventory. With that said, there is such a profound imbalance between supply and demand right now, so prices are clearly poised to rise in the immediate future. Nobody knows how long this run will go, but we would be wise to recognize inventory is about both the active listings on the market as well as demand for those listings. I find conversations about low supply can be lopsided at times if we only discuss what is on the market rather than factors that create demand. Remember, when demand changes, it can also affect supply.

Keep your credibility intact (for real estate professionals): To my real estate friends, I recommend knowing the stats more than ever and being able to articulate what the market is doing by highlighting numbers instead of being swayed by every new sensational idea. I imagine many real estate professionals (including appraisers) will lose credibility in a market like this by being swayed by clickbait, posting predictions that don’t come true, or promising a future that is not known. Remember, sometimes the best answer is “I don’t know” when people ask you to predict the future – while having intelligent discussion about all the moving parts. My advice? Keep your credibility intact by being rooted in data.

I DIDN’T ANSWER MY QUESTION: You may have noticed I didn’t answer the question in my title. But hopefully after reading my post you can understand why.

I hope that was interesting or helpful.

Questions: What did I miss? What is coming up in conversations right now for you? I’d love to hear your take.

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