Let’s talk about what’s next for real estate.
It’s been crazy lately, and I want to talk about the current market, some data, and the news that we see. This is my request to you: try your best to look at it with a clear mind and not judge without as much information as possible.
I also want to talk about some leading indicators we should be paying attention to.
When it comes to real estate, it all comes down to demand and inventory.
The demand is being played with right now because of the rising interest rates. However, the inventory is still significantly low.
Be wary of clickbait titles on the news you see on the media and the different content on YouTube and even on TikTok that play on your emotions, your fear that the housing market is going to crash, that there is a bubble.
When you look at it and listen to the economists and the people that understand where we’re at, you realize that there is no housing crash.
Wall Street Journal has an article called “U.S. Home Equity Hits Highest Level on Record—$27.8 Trillion.”
According to the article, “Soaring home prices have driven up home equity, but rising interest rates are making it more expensive to use.”
And they highlight some things that I want you to pay attention to, and I think it is important because I don’t think it has been talked about in-depth in the last month or so.
About 60% of equity was withdrawn via cash-out refinances in 2021, according to mortgage data firm Black Knight. Homeowners are likely to turn to home-equity lines of credit, said Andy Walden, vice president of enterprise research strategy at Black Knight. Borrowing costs on such products are more closely tied to the Fed’s benchmark rate, which has moved less than mortgage rates this year. The Fed is expected to raise rates again at its meeting this week. (Source: The Wall Street Journal)
WSJ continues, saying, “The amount of tappable equity increased by a record $1.2 trillion in the first quarter of 2022, to more than $11 trillion, according to Black Knight.” However, the next sentence is the key: “Close to 75% of it belongs to borrowers with mortgage rates below 4%, the Black Knight data shows.”
That typically means people won’t be touching that unless they absolutely need it.
This next one is also important. According to the WSJ, “Black Knight defines tappable equity as the amount homeowners can borrow while holding on to at least 20% of the home’s equity.”
Why is this important? Just look at what happened in 2008, when people were allowed to borrow up to almost 100% of what banks thought their properties were worth because they were speculating that the market would continue going up at an incredibly fast pace.
Right now, they only let you borrow up to 80% of your home’s value.
WSJ also interviewed Mr. Steve English, who “had considered the home-improvement work a few years ago, when the deck would have cost about 40% less, but he didn’t have enough equity to borrow against.” According to English, the equity in his home has gone up over the last two years, so he decided to tap into it.
But the thing is, the interest rate has gone up, so refinancing now costs more. That’s the challenge we’re seeing now with homeowners looking to refinance. It would create a bigger issue if banks lent money generously to people trying to refinance or buy a property through financing, as they did back in 2006 to 2007, which built up and led to the 2008 housing crash.
So, the fundamentals of borrowing are great (right now) for the most part.
These are the titles of the next articles I will go through in this post:
I chose these three to show you as many avenues of the housing market and what it affects. Real estate in general includes mortgages, anything you see at Home Depot, insurance, and anything that has some relation to the housing market—that takes up 15% to 18% of the US economy (GDP). Yes, real estate touches so much of our economy. That’s why it would be pretty bad if the housing market crashed.
According to WSJ, “Credit-card debt and other loans with variable rates are likely to get more expensive and should be dealt with first. When considering borrowing for major purchases such as a car or a home, it might make sense to delay.”
In that article, this is what the Assistant Professor of Finance at Columbia University advises us: “It’s important to really start thinking about the optimal decisions, given that the interest rate environment is going to change so much going forward.”
Here are other pieces of advice mentioned in the article as well:
WSJ reminds us of this basic fact: Mortgage rates, however, are based largely on the yield of the 10-year U.S. Treasury bond. This rate is used as a benchmark for many types of loans, including mortgages. When the Fed raises rates, the increase pushes the yield on the Treasury note higher, which in turn pushes mortgage rates higher.
Some people who can afford the fixed-rate interest apply for adjustable-rate mortgages, which are in the 4-5% range, which is significantly less compared to the FRMs now in the sixes. But, according to WSJ, “Mr. Gallagher cautions that these loans come with particular risks as rates are rising. The interest rate on these mortgages is reset periodically and could grow considerably more expensive over time. “
That’s why the WSJ cautions homebuyers to think carefully before purchasing homes.
It’s good to keep that in mind. However, that’s just one side of the story. They say houses can’t go up forever, and that is true. But the mistake everybody is making is that we are too busy comparing today’s data to what happened in 2008, and even the 1970s. While our current housing market shares some similarities with those in terms of inflation and a possible recession, it is also very different.
The market we have right now, we’ve never seen before as a generation. It has been 100 years since we’ve had a pandemic. The US pushed in so much money that 80% of the money circulating in our country right now was all pushed in in the last two years. That is what caused this massive inflation. So, we can’t really compare it to the data from 2008 and say that there was a housing crash.
According to Dave Ramsey’s Instagram post, for those people waiting on the sidelines before buying because they assume that home prices are going to drop, it isn’t going to happen because of supply and demand. Yes, with the high interest rates, demand has lessened, but for the cooling demand to lower home prices, there should be less demand than the supply available—and that isn’t the case for the housing market today.
Yes, there is inflation, and yes, there is an interest rate hike, but all that is doing is pushing out the people who can’t afford homes. But because inventory is so low, inflation doesn’t even seem to matter in most places in terms of demand for homes.
According to NPR, builders are slowing construction despite the lack of US home supply. How does slowing down construction help anything?
A new poll conducted by the National Association of Home Builders shows builder confidence in the market for new single-family homes is at its lowest level since June 2020 after six straight months of decline, "a clear sign of a slowing housing market in a high inflation, slow growth economic environment," NAHB Chairman Jerry Konter said. (Source: NPR)
But here’s the thing: According to the article, “The U.S. is about 4 million homes short of what's needed to keep up with demand, according to Freddie Mac. After the housing bubble burst, many builders went out of business and construction slowed. That lack of supply has been pushing home prices higher in recent years.”
Even with the data on new construction about to enter the market, the ones active on the MLS are still so low.
This is the dilemma we currently have on the lack of supply:
All this has many people wondering whether we might be in another housing bubble that's about to burst. But most economists say while prices can't keep rising like they have and might decline in some markets, they don't expect a huge collapse in prices similar to the one that caused a national and global recession in 2008.
Still, there is a great imbalance in the housing market that's created a serious problem. Economists say we need millions more homes, especially as millennials — the largest generation — are trying to buy houses, many for the first time. But homebuilders are getting worried that if they build them, people won't buy them, which could lead to an even bigger dip in the number of homes in the U.S. (Source: NPR)
If we look at Altos Research data for Boise, Idaho, which people say is the worst area right now for real estate, the Market Action Index says it is still a strong seller’s market. A quick look at its real-time market profile shows that the median price of homes is at $579,000, the median days on market is just 14 days, and the average days on market is going down and is now at 30. Price decrease has climbed up to 44%, but the thing that ties to a healthy housing market is rent prices, and the median rent price in Boise right now is $2,123.
If your monthly rent is equal to your monthly dues if you buy a home, why won’t you own it if you can afford it, right? Especially with inflation.
Altos also segments the market, and for Boise, at the top end of the market at a $1,150,000 home price, the average days on market for a home for that price point is 21 days. And at the low end of the market segments, price points at $427,000 on average of 10 days on market. It is still selling fast, despite the news saying that homes in Boise are overvalued.
Just as Dave said, there is a lack of inventory, but the demand is still there. People are still buying homes. Even at a 6.5% interest rate, that is still significantly lower than the rate of inflation.
At the end of the day, it boils down to the simplest fundamentals of the economy: Supply vs Demand.
I want to mention this Bloomberg article really quickly because now we have companies like Arrived Homes, which Amazon invested in. These companies give even unaccredited investors opportunities to invest in single-family residences. That’s not the only company doing it.
In Q1 of 2022, 18% of home sales were purchased by investors, and a lot of these were sold to investors that turned them to Airbnb—short-term and long-term rentals. We’re never going to see these properties come up for sale again.
What does that do to the inventory? It eats it up.
Airbnb is so crazy right now. When properties would normally rent for $2,600 a month, Airbnb gives you triple that amount. And there are some loans given out to these investors based on that future income—and those are risky.
So, inventory is still pretty low. Will we catch up? Maybe. It could be this year or next. Things could go wrong really quickly if we head into a recession and something happens, or the economy gets worse, or the war expands. But where we’re at right now with the demand and inventory, it is still a healthy housing market. That’s why economists tell us that home prices are still likely to go up.
We’ve never been in this market before. The state of the real estate market since the pandemic began and up to now—we are basically in uncharted waters. It isn’t like 2008, or the market during the 70s and 80s.
Keep paying attention to current events, the stock market (if you can), what is happening with rates, inflation, recession, etc. But right now, where we’re at, supply and demand dictate the housing market isn’t going to crash.
