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How Bad Will This Housing Crash Be?

The headline news is everywhere.. “We’re heading towards a recession”. “Homes are not selling”. “Housing market is crashing”. You’ve seen it, we’ve seen it. The news talks about it, your parents have heard about it, and clients are definitely asking about it. What's REALLY happening? What do the facts tell us? What historical trends are we seeing? What are the boots on the ground professionals telling us? Today we’re going to jump right in and discuss the future of the housing market, will a crash occur, and how bad will it be. 

 

First let's discuss the economy as a whole. Housing and the economy go hand in hand when reviewing whether we’re in a bear or bull market and the future. Since the beginning of the year there have been three TRILLION dollars wiped out of the markets. That’s people's retirement funds, 401k’s, and investment portfolios. This is not including the two TRILLION dollars of crypto that has disappeared in the wind. What may have caused this? There are a number of factors involved. First, you have to consider that 40% of America’s dollar was printed in just the last 2 years. 40%!!! We’ve basically created money out of thin air without generating it from a value exchange, which naturally causes the value of the dollar to decrease. This has caused a lot of fake success to be distributed amongst many people that don’t know how to properly handle money and increase its worth. Makes sense considering online sales had a 6.1% increase last quarter. 

 

Since the beginning of the pandemic the FED lowered the interest rates to basically zero so they can pump the economy and save it from a downturn. On the opposite side of the spectrum congress decided to print trillions of dollars to also “pump” the economy. This goal would have been achieved simply by lowering the interest rates to have a steady and natural growth. But putting printed money and zero percent interest rates together is a receipt for disaster. We’re seeing inflation in every sector of the economy. From energy to food and apparel. The war in Ukraine, injudicious spending by the government, and now rising interest rates are to blame. 

 

What does all this in turn mean for Real Estate? Let's talk about some numbers.

The National Association of Real Estate just numbers on July 20th showing how housing inventory is back up to 3 month supply. The month before was 2-½ month supply, and only the month prior housing supply was at 2 months worth. So in 3 month the inventory of homes for sale has risen by 1 months worth of inventory. With a simple search on zillow we can clearly see the inventory spikes regardless of what area you’re in. What stands out the most is the amount of price cuts we’re seeing. Something we weren’t used to seeing the past couple years. When pulling CMA’s for your clients what shocks us most is the list to sold ratio. When was the last time you saw homes being closed for BELOW list price? Long time I bet. 

 

Mortgage applications as of June 2022 are down 52% year over year. That's over half of a business decline in just over a year. It gets worse. Refinance applications are down over 75% year over year. This makes sense because with rising interest rates not a lot of people need to refinance anymore. Statistics like this make it a clear indicator that if you're running a mortgage loan brokerage, it's crucial that your main source of business is new mortgage loans rather than refi’s. Refinancing will fluctuate drastically depending solely on current interest rates. But your new mortgage sector should have a steady stream of business. Unless we’re in 2022, of course. 

 

Do you remember the mortgage forbearance the government issued during the beginning and extending during the peak of the pandemic. Well, the forbearances are done. Loan payments are due. It's true, many banks are being very lenient with the clients, allowing either more time or a structured payback system for the missed payments, but foreclosures are up. How much have they risen year over year? 700 percent. No, that’s not a typo. Foreclosures are up 700 percent according to Attom. In comparison, we’re right back up to 2020 numbers. Keep your eyes on this because by the end of year this number may sky rocket even higher. 

 

The next statistic we’ll take a look at is new building numbers. Supply shortages are easing and builders are RUSHING to finish the homes and put it onto the market. The largest construction company in America, Lennar, has also stated that they have canceled numerous projects. One of the reasons why we’re seeing massive inventory surges is because the new home construction particularly in the South and Mountain West areas are finally reaching completion and hitting the markets hard. When comparing home building rates to inventory growth it reveals a clear trend. The more building there is the larger the inventory grows. Consider these numbers we’ve pulled. For example in Rockwall County Dallas there's 42 thousand active permits pulled for new construction. That's a 17 percent increase in housing supply in the past 2 years. This condition is likely to get more accentuated as the year progresses because there's still about 1.7 million homes actively under construction awaiting delivery. As material and labor shortages ease, there will be even more inventory showing up in America’s Housing Market. 

 

With a declining and unstable economy, layoffs are inevitable. Major Real Estate companies like Compass announced that they were laying off 450 of employees due to “clear signals of slowing economic growth”. Redfin followed along and announced they would be laying off about 8% of their workforce due to “declining housing demand”. Mortgage lending jobs have been hit harder with companies like JP Morgan reporting that in their most recent round of layoffs they were letting go of more than 1000 employees. Online mortgage lender Better.com has let go of the most employees in the industry, totaling more than 3,900 workers over three rounds of layoffs starting in December of last year. The first round, which came when rising interest rates were barely on the horizon, brought attention to the company’s CEO, Vishal Garg, who announced the layoff during a now-infamous Zoom call.

 

Now this is all bad, it really is. People losing homes, losing jobs, builders selling low and fast to get out asap, listings rising rapidly, home prices being cut, list to sold ratio going negative, and so on. A lot of Real Estate Professionals compare today’s numbers to pre pandemic 2019-18 numbers. But looking further back with historical facts and trends is really the right way to present the current market and future standings to your clients. As a Realtor I explain to my buyers that it’s always the right time to buy. If you're ready to make a purchase today, and this home is where you see yourself for a long time, then you make the purchase. What about the sellers? Has their ship sailed? What do you tell them today, while holding your ethical fiduciary responsibility in tact? 

 

Elon musk says a recession is a part of a natural economic cycle so you must do 3 things. Predict, by studying history, facts, and crunching the numbers together. Prepare, by informing your clients on all the data you’ve researched. More important than that is preparing yourself. You’re working too, and probably have a family so if we’re headed towards a recession you’ll be just as affected as anyone else. Lastly, Persevere. More millionaires are made during war and a recession than in any other time. Get trained, arm yourself, and get ready for a battle.