When Will the Madness Stop?

posted in: News | 0

For anyone trying to buy a house these days, there is a lot of frustration out there. There continues to be a lack of inventory available to select from. Couple that with a strong buyer pool that competes for that low inventory, pushing the prices to incredibly high levels. If you are a home seller, we have never seen such a strong “seller’s market.” Now looks like a great time to sell with all this “froth” in the market. Homes are selling way over list price, and the list prices are often very high from the beginning, getting pushed to new heights in the ensuing bidding wars. These major bidding wars are rampant. When will this “madness” end?

We all know that history is a strong indicator of what to expect moving forward:

Affordability: This is a general indicator of the percent of people who can afford the median price of a home in a particular area.  We are fast approaching the “trouble zone” of affordability, which is in the high teens. Typically when a market hits around 17% affordability, the markets starts correcting. We are very near that number now in Southern California and many markets across the nation.

What affects will inflation have on the real estate market?: While the job market is still strong and there are many millions of unfilled jobs, real incomes are actually decreasing because of the high inflation we are experiencing. Living costs are increasing more than incomes are, cramping the average American’s budgets. We are being told that inflation is in the high 7% range, but in reality the items in our budgets that we spend the bulk of our disposable funds on like food, energy, housing, and gas are rising at double digit rates. We have an antiquated measure of inflation (i.e., the PPI and CPI indexes) that does not tell the real story of how bad inflation is.  With our massive federal debt and rising interest rates, our national debt service is through the roof, which will cramp spending on items that can increase our GDP.

Interest Rates: As you all know they are rising. Mortgage rates are 1.25%+ higher than their low point we hit last year, and the upwards pressure on them mounts.  They Fed just raised the short term rate by .25% and has plans for many more rate increases moving forward to hopefully get inflation back under control. This means higher credit card, car loan, and equity loan costs for the consumer, further constraining their ability to spend money.  And we all know that consumer spending is the most important component to a strong economy.

Stock Market: As you are aware, we are in a correction mode (a correction is defined as the markets moving 10% or more in overall value). Hence, those invested in the market are losing value, and hence feel less wealthy today than they did months ago. This will affect their buying and spending decisions.

Real Property Values:  As discussed above, we are in uncharted territory on property values now. Historically, when they have increased this rapidly, their assent does not stay linear. It dissipates and loses steam. Will we see another Financial Meltdown?  What is interesting about this real estate cycle is building and lending did not get off their tracks like it did leading up to the Great Recession. This go around, borrowers had to prove that they had the credit, income, and assets to weather financial storms. Hence, we have a very stable borrowing base that should be able to weather our current financial storms. Most homeowner’s locked into long term 30 year fixed rates when they dipped into the 2% range the last few years. In addition, the equity in their homes has increased dramatically the last few years, so they have a nice “pot of equity” they can tap into if need be.

Russia: So far, the world has minimized the fallout from the Russian invasion of Ukraine. The world (other than China and Iran) have united against Russian aggression. That being said, Vladimir Putin is unpredictable and our politicians continue to make mistakes on the global front. Very hard to read how this saga will end, but nothing good will come out of it, so assume that this world issue will impact our real estate market for the negative.

Summary: Prices cannot and never have continued to rise at the clip they have the last few years without slowing down and/or dropping. That being said, there is no end in sight to the shortage of housing available. However, the number of households that will be able to afford to buy at these prices will dwindle.  Rent increases were slowed by government intervention, but those interventions are coming off now and you will see rents rising again, which will further squeeze American household budgets.

If you are trying to buy a home: Try and be patient. The buying frenzy will dissipate, it always does. Try and find off market deals to pursue to avoid the bidding wars. For now though, the madness continues. Just trying to give you a little perspective on what is “brewing” out there.