Can the Real Estate Boom Survive Economic Headwinds?

Is it a bad time to buy a home? Lots of headlines and housing bears this week citing a Fannie Mae survey that said 65% of respondents now say it's a bad time to buy a house. Only 25% say it's a good time. If Americans think it's a bad time to buy a house, does that mean the housing market is ready to crash? 

You may have clients thinking this way. The question is, what do home buyers need to note today? How can we communicate with them? The data about what's happening right now and what to expect. One way to approach this fear is to ask questions. One great question, especially right now is “What's your time horizon?” is it a good time to buy well, what's your time horizon? How long will you expect to be in the house? Is this a house you love? Is it a house you can afford?

With this survey from Fannie Mae people were answering about their short term fears. They know it's ultra competitive. They know there are bidding wars. They know that inventory is at a record low. And in that sense, yes, it's kind of a bad time to buy. It's super competitive. It's a bad time to buy. It's like that old Yogi Berra line “Nobody goes to that club anymore. It's too crowded.” it's a bad time to buy because everybody's buying.

I interviewed Bill McBride for our new Top of Mind podcast that we're producing with the Altos Research team. Bill is a highly regarded economic writer who very clearly identified and wrote about the housing bubble in 2005. We spent an hour looking for risks facing this housing market. We're talking about this question. Is it a good time to buy? Is it a bad time to buy? These interviews on the Top of Mind podcast are how we add context to the data. It's the boots on the ground. It's the leaders and thinkers in the industry. There's a lot of great interviews already on that podcast. And in this world where we're all afraid, and the buyers are afraid, then Bill and I wanted to explore what, what do we actually have to be afraid of? 

Timing the Real Estate Market

When people ask me, “Is it a good time to buy?” my rule of thumb is don't think about timing. If you like the house and you can afford the house by the house, if you don't like it, or can't afford it, don't buy it. Don't buy it because you think you have to, or you have to get it. Bill in his interview on the podcast, pointed out that in 2005, when people asked him, “is it a good time to buy?” Bill would say, don't buy a house now, but he also noted that he doesn't say that now in these conditions, the conditions are very different from what they were in 2005. Bill now might reply with a question. The question being “How long do you expect to be in the house?” 

This is what we're going to discuss today. It's a confusing, scary time to be in the real estate market. Right now, there are risks in the short term, there are big demographic shifts in the longer term. We're going to look at what we know right now and what we can see for the coming year already and what people can expect. 

Big ideas for the day: We know that we're in a rapidly rising mortgage rate environment. We also know that we're an intense buyer competition market. How do those things work together? We can ask “when does inventory finally start climbinng?” We have some forecasts for you and some ways to think about what might be coming for inventory. The whole conversation today is about how we help clients through their fears right now. 

Then we'll spend the last little bit of the webinar today looking at some of the local markets and some of the things that are really evident across the country. We got a lot to hit, let's get started. 

Rising Mortgage Rates

Biggest news of the month is rising mortgage interest rates. The 30 year rate this week jumped over 3.9. I think it's settled back down a little bit. In the last few years rates have been falling, they were up a little bit, but mostly flat for 2021. And then all of a sudden 2022, we've got a big spike.

The interesting thing about this at 3.9, like 3.93, which we hit, I think maybe Tuesday of this week, it's actually above the long term average for the last decade. What we might see is that is a threshold for buyers to start feeling that maybe, things are expensive, unaffordable. 

The last time we were above the long term average was in 2018. And if you've heard me talk this spike in 2018 is a good reference point for how the rest of this year might play out. If rates continue to rise, what we could see is rates rose sharply in 2018, they peaked at 4.9% in the first week of December of 2018. 

And that had the effect of pulling some demand early into 2018, as people were worried about rising rates and it had the effect of cooling some demand and adding to supply at the end of 2018. We actually started 2019 with more inventory than the previous year. And how much, that's the question. 

What we can see already: rates have spiked, it is notable that 3.9% is higher than the long term average. And it may be the threshold that people see. Now, what we don't know is do they stay here? Do they fall back down? I have no capacity to predict interest rates. We can only look at what we know is happening to demand, how we can measure immediately in the real time with buyers and sellers with pricing changes. 

And that's what we're going to report on here. I don't know whether rates go up or down from here, but I do know that 2018 is an excellent reference point for what might happen to the market. We don't forecast any catastrophic change, no bubble bursting, based on all of the trends that we could see right now, active inventory of unsold, single family homes in the U.S. this week was down to a record low. It's still falling every week. And it is a long way from being back to a normal place. Normally inventory starts ticking up in February and by March it's on its way up on the curve. 

Real Estate Inventory vs Rising Mortgage Rates

Last year, inventory kept falling until April 30th and you can see that low point before we finally started getting our climb of inventory, which peaks in June, July, and then starts falling in the second half of the year again. 2018 had rising rates. The first week of February 2019 we had 816,000 homes available versus 768,000. The year before you can see a little bit of change, like a 10% increase, not a skyrocket, not a hundred percent change, not a crashing market, but you can see the inventory climb. That's what we might expect for this year. 

What we don't know is when we are over 3.9%, is that enough for people to make it feel expensive? In 2018, it was four and a half percent before the market notably cooled. We don't know what the threshold is. We've been low for so long. We don't know what feels expensive. but you could see, this year is likely to get a little bit more inventory as a result of rising rates. 

The interesting thing is that all the buyers are locked in with their mortgage.Their rate lock was from December or January. And the buyers this month don't yet feel the higher rates. They fight a little bit higher, but not really, still ultra low. What happens right now is we get buyers who want to act quickly so they don't get more expensive mortgages if their rate lock expires. 

The Most Current Real Estate Indicators

Currently there are a couple of things, to note, when you're describing the Altos inventory numbers to your clients. For single family homes, for example, when you compare the Altos numbers to a headline from NAR the Altos number tends to be a lot lower, and there are a few reasons for this. 

Most of the headline numbers that you'll see NAR publish will be all property types, NAR includes pending sales in their inventory number. They say that, if a house is pending, now it must have been available inventory in January. When they're reporting the January number, they will include that in inventory. But what Altos does is we're looking at, if you walk into the market today, these are the homes for sale. there'll be another 80,000 or that get listed this week, but a lot of those are going very quickly.

Inventory and Delayed Housing Construction

One of the other interesting things that's happening right now with active inventory is normally there’s a bunch of new construction that's hitting the market that you can buy and it's brand new and it's marketed, essentially like resale. It's small builders.

But what's interesting right now is that because of the supply chain challenges, many homes that would normally get completed in four months now taking 14 or 16 months. And in the Altos number, we're looking at that. You could buy that place number, but you can't live in it. We're actually taking that out of the available inventory of homes to buy, out of this number. If it's not available to actually live in until year, we remove it from the active inventory of homes for sale. What's happening is as inventory gets delayed, that decreases our active inventory. 

Now, it also means that when that finally gets completed in 14, 16, 18 months, that will add to inventory. And those will eventually help us get a little more inventory, but probably not this year, that's probably adding in the next year. 

Distressed Properties

One of the places where inventory traditionally might come from would be distressed inventory. People who, who due to economic conditions, can't make their mortgage payments. And they go into foreclosure, delinquency and foreclosure. That's not coming. And in fact, we just crossed over the record few homes at anywhere in the delinquency pipeline. We've worked out all of the pandemic delinquencies, the forbearances. We're back to record few homes anywhere in delinquency. That means record few foreclosures are coming, and it's not just a foreclosure moratorium. It is  record few people who are late on their mortgage, and that's unlikely to change because everybody in the country has a 30 year mortgage locked in at 3%. 

And we're in a booming economy. Employment is up and wages are growing and in an inflationary environment those mortgage payments are even cheaper. What this means is that there's no inventory coming from the distressed from the distressed market.

There are no short sales because nobody in the country is short. There's no foreclosures forthcoming. I mean, essentially none. What we also know is that the mortgage delinquency rate is likely to continue to keep falling as for example, inflation keeps happening. The price of the home goes up, the equity goes up, the relative amounts of my payment is lower. it actually becomes more affordable to make my old mortgage payment.

There are very few people with a variable rate mortgage anywhere in the country, only a few people, like 4% of the market, is variable that would have any exposure to rising rates in that sense. It's very low. There's very little inventory coming from the delinquency space.

Housing Inventory Seasonality

Each year the bottom of inventory is January, typically would be the bottom in January. And then by February, March, inventory starts climbing it peaks in the mid summer and then starts falling for the second half of the year. 2020 pandemic year, everybody was buying everything, rates fell under 3% and inventory never rose that year. 2021 you could see that it got back to a more normal annual curve, but it doesn’t bottom until April. 

Here is what may happen, what we're looking to happen for this year. If you expect rising rates, we know that inventory should start climbing. Like that's the dynamic that we're looking at. There's no spike, there's no rush. There's not any of those things, but it becomes less affordable  for two mortgages at the same time, for example. And I sell one of the houses to buy the next one. 

When rates are at 2%, it becomes really easy for me to own two mortgages. And now I have two and it's perfectly fine. But because they're all locked in, rising rates don't impact anybody who already owns. They impact the next purchase. In a rising rate environment, interestingly, the opportunity may be for new home buyers. 

New home buyers aren't quite as sensitive to what rates used to be. They only know “Here's what they are right now. It's time for me to buy. I'm married. I'm having a kid, it's time for me to buy a house. Here's what the rates are. Here's what I can buy.” Those life events don't change based on rising rates. But maybe my price window changes. We might end the year with slightly higher active inventory. What's wild is it's still almost record low. There's really no indications of any bulk amount of inventory hitting the market.

"Is it a good time to buy?"

Talking to your buyers, the question is: “is it a good time to buy?" Well, it's going to be competitive. One question is, “what do you expect rates to do from here?” If you expect rates to go up, maybe now is the best time to buy. Answering the question of "is it a good time to buy?” with the question of “where do you expect interest rates to go?” might help your clients think about their timing. It might help them frame their answer to that question better than they would without that realization. That's what we could see for inventory for the year. 

This is a model, it's a forecast. We change it every week when we get the latest data points. It'll be fascinating to see things like do the new construction things continue to get more delayed or do those start to get completed this year, and we can put those into inventory numbers. That might add to total inventory by the end of the year.

Real Estate Pricing

Let’s look at pricing. We know right now, the median price of single family home in the US, is $375,000. It curves up each week typically through June and then peaks and then heads back down. We had a plateau last last summer at 399, didn't get over 400, but I expect to cross that threshold in the next couple of months here, and reach new highs. 

Each week a new set of homes come to market and each week those sellers and those listing agents know all of the information about their local market. They know how many bids were on the last house. They know how many people are in the open house, down the street. They know that nobody's needing to take price cuts. They know that things are moving quickly and all of that information lets you price the next listing a little bit more aggressively. Each of those things is a signal. And what it means is that right after the first of the year, the new listings pricing starts spiking.

What's interesting is you can tell the price curve for the year based on how fast those new listings are spiking. And this year thhe new listings are getting priced as aggressively as everything on the market. And it's likely to turn up. We are going to continue to have our price hikes for at least through the peak of the summer. By then we could imagine that maybe there is the inventory buildup. 

Affordability, payment affordability. If rates climb could definitely put a cap on how far the prices spike for the year. As of right now, the data looks like another 10% home price appreciation year. 10 to 12%, but you could imagine that gets muted a little bit. If rates continue you to rise, and because we don't know how high they go, and we don't know how sensitive to consume to that consumers are. but the signals right now are all very bullish on buyers, on pricing. Therefore keeping the inventory low, but because people are buying everything in sight. 

Pricing as Leading Indicator

Let's look at some of the leading indicators of pricing. New inventory comes out in the first quarter. If you list your house in January to get ready for the spring, and then all of a sudden it's still on the market in March, maybe you've overpriced it and you take a price cut. Price cuts are ticking up in March of each year. Last year they didn't because of overbidding and there were bidding wars. And there's no inventory. People were taking everything they could. Price reductions kept falling, normal price reductions nationwide is about a third of the homes are overpriced before they take a price cut. There's always price reductions. They're always some who are testing the upper limit about a third is normal in a lot of local markets. 

In fact, the local markets that I have pulled up on the Altos reports to review at the end here, a lot of local markets might be 40%, might be normal or 44%. What we know is that if 35% is normal, we've had, this time of year is really about 24%, 25%. Last year we were only at 19%. A third of them think they're overpriced, but a lot of those people are getting their offers. And only 19% have to take a price cut. And this year we are now accelerating, meaning, fewer are taking price cuts than even last year at this time. This shows us that as of right now, rising rates have not cooled at anything. In fact, if anything, maybe rising rates have accelerated demand for the first quarter because people want to get in before the rates rise. 

Looking back at what happens when rates rise, you could see the difference between January of 2018 was 24.1% of the market had taken a price cut. By 2019, that spring of 2019, the rising rates had cooled the market a little bit. And 27%, 28% took a price cut. The difference is, just a few more price cuts, just a little bit of inventory build. That was the result of rising rates. And that was how the market responded. And that is the model that we're using right now for what we could expect.

"Oh, did I miss my window?"

And you could feel it if you were selling and you went to market to sell in August of 2018, you were "oh, did I miss my window?” You could feel it, but ultimately it was fine. People sold their homes. It wasn't catastrophic. There's nothing in the data that says any kind of catastrophic change. but  you can imagine sellers, if a seller is thinking about timing, like it's probably peaking right now. And is it better to get it out now or to wait till August? Like you can point to the 2018 window and say, “look, August is going to be fine, but if you don't want to worry, now's your peak.” Timing wise, you could use price reductions when communicating with potential sellers.

One of the most powerful phenomenon of the last few years is that the percentage of homes that are getting listed and taking offers essentially immediately, that is sometimes within hours or a couple days. What we know is about 30% of the homes are going into contract essentially immediately. 

If the market cools, one of the phenomenon that we should expect is a lower percentage of the new listings that go into contract immediately. The first thing that happens is buyers say, “Wait, maybe I'm going to have a little more selection. Maybe I don't have to place an offer on this right now.” In the Fall, it went from like 20 multiple offers to four multiple offers. It was still multiple offers and we were still going immediately. We never even got to those that had any opportunity to actually decrease our immediate sales.

But, for buyers and sellers what worked in communicating here is that the properties that are priced right, do have the opportunity to go immediately. It means you don't have to worry about alternative financing things. You have the opportunity to sell immediately the well priced property. That has not yet declined at all percentage wise. It's in fact, getting greater, more homes are going immediately.

But it's one area that I look for as a leading indicator to know how much our rising rates actually impacting what we're doing here. we can look at price increases. We'll do a few more and a flip over to our, to our, local markets. 

Price Increases

Percentage of homes on the market with price increases, these are investor flips. Sometimes they are marketing changes. A house might have been listed in December but didn't get offers over the holidays. They may be doing an intentional price increase to shift price points, to get attention, this spring. 

Currently about 6% of the homes on the market have had price increases. That's really high. Each year it climbs in the spring. It's the buying season and the best inventory's coming now. It does climb, but it's spiking really quickly as sellers, investors, flippers are leaning into the hot demand. What we're hoping is that this doesn't peak at like 8% or 9%. 

9% of the market with price increases feels very scary to me. It's scary because when you have that level of demand, you end up getting increases in fraud and other bad actors in the space. And those are the signs of bubble bursting that we look for. What I hope is that rising rates cools the market demand a little bit, takes some of the real froth out of the buyer market. 

Hopefully price increases tops out lower than last year, gets back down. Normally it might be two or 3% of the market, but last year it was 6% and then 8%, 9%. Right now we're at 6% again. It's one of those super, super hot indicators that have not shown any sign of slowing yet, but this is where we look. 

Days on Market

Finally, let's look at days on market. This time of year, as new inventory starts to come on the market, the actual days on market starts to decline. Normally this time of year in Q1, you might have a hundred days. This includes stuff that was on the market over the holidays. This year, we're at 56. Last year the peak of the frenzy was in May: the whole country, all homes, median days on market was 21 days. 

As immediate sales going in zero to seven days, we have all of the junk—the hard to sell properties, the weird ones, which normally take a long time in a really low inventory environment—those homes sell. And in fact, it's an interesting listing strategy for agents in your community. Which are the weird ones, because the weird ones, if they need to get out, now is the time in a low inventory environment. Now is the opportunity to sell the weird ones. Like if it's on a high traffic street, it's always going to be high traffic, but right now, if that's your only option, then there are buyers that end up showing up and buying it now. As a listing strategy: what are the weird properties? Are they ready to sell right now into this hot environment? 

Because that window may be closing if rates rise and are persistently higher. We may have slower days by this time next year. It's going to be really fascinating to see where the low point is this year. It's starting to fall. And we'll see, do we go below 21 days? We'll see what happens there. 

One thing to make sure when you're looking at your Altos reports and when you're communicating with clients about what's happening in the market, we've been talking about the whole country, all price points, but in our Altos data, we take every market into four price range, segments, market segments. The high end of the market may be behaving very differently from the low end. and you can see right here, this is nationally, high end of the market's over a million bucks. The midpoint is $375k,  the upper middle is $500,000. The below middle is, in that $300k-$350k range. And then the low end is $130,000. 

"You can see exactly where the demand is"

What's interesting is you can see exactly where the demand is. We can see that, right now, the middle two ranges are about 42 days. They'll drop quickly from here.We can look in local markets and see some of those places are already down to zero days. Seven days on the market, median right now, already there. Your client may say, “Hey, I want to sell” and know everything's going fast and you say, “Yes, but you're a million dollar property here. You're taking significantly longer, maybe twice as long to sell as the rest of the market. We need to price appropriately so that you don't get screwed.” We use the price ranges so we can talk precisely to them at the local market level. I'll show you that in some of the local charts, in a few minutes,. 

By the way, as I'm talking about these things, I use a lot of questions or scripts, ideas about how to frame the data. If you need those, you should go grab the Altos ebook: how to use market data in your business. It's how to talk to the stats, which ones are important, which questions to ask, scripts, et cetera in there. You can download that from Altos. If you're new to Altos, go get that ebook, because it'll really help you understand how to use the data in your conversations. 

The Real Estate Market Action Index

The market action index is the Altos at-a-glance measure for answering the question “How's the market?” I read that 65% of the country thinks it's a bad time to buy a house. I read only 25% thinks it's a good time to buy. Therefore they must be not buying, right? The market must be tanking? Well, the market action index is in every Altos's report and lets you know, “is the market tanking? Is it heating up? How hot?” 

We're currently at 60. On this scale about 30 is about balanced, below 30 is buyer’s market. 

When we're at 60 we're in a strong sellers market, super tight inventory, lots of demand. Then we can watch, is it increasing? Is it decreasing from here? Is it cooling? And right now, it's actually increasing nationally for the month. It's March and that's common, right? But later in the year you might say to a client:

“Rates are rising. We know that the market's cooling a little bit. While we have your house listed, I'm going to put this report in your inbox every Monday morning. I want want you to look at one number. If you're worried that you over-priced, if you're worried that buyers are getting scared, we can see that in this market action index and we'll watch it. If it's closer to 30 closer, to a balanced market, that means your buyers are weakening. Your seller competition is increasing and maybe we need to get in front of this with our price."

“While we have your house listed, I'm going to put this report in your inbox every Monday. And I want you to look at one number.” That's what Altos does for you. It puts that report in their inbox every Monday. 

Looking at that market action index over time, you can see a few things in here, the big spike last year.  And we're just having a big spike right now in the Spring. And it's maybe even going to be higher than we saw last year. We have real demand and record low inventory. You can see record high demand. And this is where it shows up.

We've been in a seller’s market condition nationally for years. We haven't had real true buyer's opportunities for many years. And that's actually another question for buyers. “I'm afraid that all of a sudden there's going to be some inventory and I'm going to buy too soon. I'm going to buy at the peak.” The question is, “how long are you going to wait for buyers conditions? How long are you going to wait for that real opportunity?” If you can afford the house and you like the house: buy of the house.

Let's switch now to some local reports and then we will wrap up. 

Boise, ID Real Estate Data

Let's look at Boise, ID. Boise was a fascinating one I've been watching because Boise had real powerful inbound immigration from a lot of California. A lot of LA moving to Boise during the pandemic. It's what we call one of the “zoom towns” where people can work remote, and Boise was super affordable to a California income. Boise is one of these markets where it would be normal to see maybe 40% of the homes have price reductions. 

Then: the pandemic started. We had a little bit of rise and then the demand kicked in. Normally it’s 40% taking a price reduction, but all of a sudden down here 4%, or 5%, 6%. And if you remember last spring in Boise, people were buying everything. This fall we were watching the price reductions climb. Some of the inbound immigration slowed. If you'd overpriced your home, you had to take a price cut to let it move. It got to its normal range. 

Last fall I was encouraged that maybe the frenzy was past us. It turns out though that what's happening right now is, price reductions are falling very rapidly again. Still way different from last spring. But falling again. What I'm going to be watching is whether, as rates rise, the price reductions start climbing back to their normal level. That would be a signal that we can really communicate with home buyers and sellers. 

The top end of Boise, these are LA prices. And you can see that, where the greatest demand is 28 days is here, are at the 600k, 650k range. That's where the demand is in Boise. This is where you're buying in the greatest competition. You still have most of the competition here, but it's a little cooler at the 750k range. Velocity wise, many more transactions happening down here in the lower half of the market than in the upper half. That's Boise. 

San Diego Real Estate Data

San Diego recently, is screaming. It's also had a ton of inbound immigration. It was already more expensive. San Diego's normally a 40% price reductions market. And then we were down at 30%. Last spring was at 19%. We're already only at 14% in San Diego. Like San Diego is looking as hot as it could be hotter than it was last year. The market action index is up at 88. It's super high, rents are rising. The days on market is already only 14 days. Bationwide, we're at 56 days, but in San Diego, it's only 14 days. 

All of these things are coming in into play. In San Diego, everything's going in just a few weeks, but you can see the higher price segment, these are the fastest moving properties. When you get down to the lower stuff here, these are older, smaller, and only 14 days, but you can see, like it's taken a little bit more time to move. 

Cleveland Real Estate Data

Let's move east. Cleveland, like every market in the country is in strong seller’s conditions. The inventory tightening and demand increasing. Price reductions: normally in a 30% range. Last year down to 20%. In Cleveland price reductions are already below last year at this time and looks like we're going to hit, this record, hot market down here as well. The low end of Cleveland, these $56,000 homes, these are real junk, you can see that they take 90 days. 

Orlando Real Estate Data

Let's look at Orlando. I always like to keep my eye on what's going in Florida. The market action index is climbing rapidly in Orlando. Normally in Orlando there are a lot of investors, a lot of institutional buyers and things like that. And normally price reductions in Orlando is in the 40% range. Then last year it was 30%. We got as low as 17%, 18% in Orlando before it cooled for the Fall. We're already at 20% with price reductions, meaning there's already record low inventory. There's tons of buyers. It's shaping up to be a hotter market in Orlando. 

And remember, I talk about this as a leading indicator: price reductions as a leading indicator. Here's what happens:

1.  House on the market now. 
2. If it's on the market now, and if it doesn't get an offer, it's now it's March.
3. it takes a price reduction in March. 
4. It gets an offer in April. 
5. It closes in May. 

In the traditional data, you start learning about that in June and July and August. What we can already see today in the Altos data is that there are very few, almost record few, homes in Orlando that are taking price reductions right now. They already have multiple offers. We can already see the future transactions are going to be super strong because one of the leading indicators we can use is price reductions right now. 

And you can see exactly where the demand is in Orlando, right at the national, the national median. And you can imagine this is people moving from Cleveland and New York and all over, to migrate into Florida. And that's the home price. It's also the buy box for the institutional buyers. It's much harder for them to do deals in the million dollar range. That’s what's going on in Orlando. You can see it already in the data. 

Okay. that's all we have time for today. Thank you much. If you are looking forward to looking for the mechanism to communicate this data with your clients, go to altosresearch.com and book time with our team. Grab the ebook. If you're sitting here going Mike, we didn't have time to look at my local market. Can we do the local market? You can go to altosresearch.com. Book time with our team, we will do your local market. We can brand the reports for you so your clients know exactly what's happening right now and they're not waiting for August to know what's going on in February.