There’s an absurd amount of propaganda about the housing market in the news these days. And it’s not just our clients who are absorbing it. Realtors are coming to me in a panic over clickbait-style headlines from respected journalists. I was watching a video the other day in which a journalist stated we could see a “20% decrease in housing year over year.” But they didn’t elaborate at that point which is deeply irresponsible considering their profession and influence. What does the layman take away from that loaded statement? That property values are plummeting. But professionals recognize the answer is more nuanced. Or they would if news wasn’t hammering this alarmist narrative into their heads over and over. The truth isn’t all sunshine, but it’s not that grim either. And it’s your responsibility as a top class realtor to educate yourself and pass this onto your client base.
So, let’s start with a fact. Existing home sale inventories are down 5.4% between May and June. A novice might read that and think “Oh no, my home’s value is dropping.” But it’s actually a leap to that conclusion. The truth is that it only means the volume of homes on the market is down.
Of course, this isn’t fantastic news, but let’s look at why the volume is down. The Federal Reserve raised interest rates by 0.75% on June 15th. This follows right on the heels of the over two years that the world was locked in their homes because of a pandemic. This is the first summer when people are actually traveling with some semblance of confidence. Put these factors together and it’s no wonder fewer purchases are being made.
It’s important to recognize that a recession, which we’re in, doesn’t necessarily mean a housing recession. I can’t blame anyone for using the Great Recession as a point of reference. It’s definitely the most memorable recession in our lifetime. But we also experienced recessions in 1991 and 2001. And during those recessions, home values stayed more or less the same. There was even a graph put together by property data company CoreLogic making the rounds a few years ago illustrating that in three of the last five recessions, home value actually went up.
Let’s examine another fact. In the U.S., there are currently 1.26 million unsold homes sitting on the housing market. We consider that a three-month supply in this industry. What does that mean? Basically, if no new homes hit the market at all, all of these 1.26 million homes would sell in about three months’ time. Admittedly, a three-month supply is lower than our ideal. A healthy housing market offers a stable six-month supply. But to meet the current housing demand, the U.S. needs to flood the market with about 4-million residences. Fortunately, we are seeing progress. In February, reports showed the annual rate of home construction was up 6.8% from last year. Is it enough? No, but it’s a step in the right direction.
How did we fall into such a supply shortage? The problem began during that first housing crash that started in 2007.
Naturally, builders stopped building new homes during the crash. And it took them a long time to regain their confidence. They didn’t really start digging in until around 2015. Even then, it was a slow buildup because prices were going up so high. Then, at the beginning of 2020, we got knocked flat on our backs by a global pandemic. So, we stopped building again. Since then, we’ve had to deal with supply chain issues leaving houses in varying states of completion. And when builders can find the materials they need, the material costs are frequently through the roof.
Those drawing parallels between the 2007 housing crash and what we’re experiencing today are overlooking the mortgage situation. Prior to the 2007 crash, it was fairly easy to get approved for a home mortgage. But the country as a whole walked away from that crash with some tough but memorable lessons. And these days, the people walking away with mortgages are far less likely to default on them. It’s hard to believe there was a time when you could get a mortgage without proof of adequate income. Good luck finding a similar offer today. The majority of government loans post-crash require you to meet a stricter criteria. If you don’t have a decent to impeccable credit score and a substantial downpayment, your chances of a mortgage are slim. In fact, the Federal Reserve shared that in the 4th quarter of 2021, 67% of approved mortgages went to applicants with above average credit scores exceeding 760.
We’ve also been seeing developers selling off their land. Have they lost faith in the housing market? Definitely not. They just don’t think the supply chain issues are going to get better anytime soon. And who can blame them? China’s still backlogged. Russia’s invasion of Ukraine is creating all kinds of global issues. The Federal Reserve is in the midst of inducing a recession to control runaway inflation. The strengthening of the U.S. dollar is driving global transactions away from our country. And then there’s that persistent supply chain issue.
In Los Angeles, JohnHart’s base of operations, the housing supply is hovering around 11 weeks. Just three to four months ago, it was at five weeks. The U.S. is currently at about a three-month supply while it was at around eight to nine weeks a few months back. Sure, it could go back down, but the full picture is a little more nuanced than what the media is portraying.
I briefly mentioned that the U.S. dollar rose against the euro. More accurately, the euro took a temporary dive. A lot of people heard about this and thought it was a good thing. But we actually don’t want the U.S. dollar to get too strong. Why? Because the global economy then gets less bang for their buck when buying American. Ultimately, it could lead to a good thing as foreign investors pull out and allow us to amass the housing inventory we need.
But if anyone is telling you today that we have too much inventory, they’re missing the big picture. At the worst moment of the housing crash that started in 2008, the U.S. had 18 months of inventory. We currently have three months of inventory and need six. So, I can say with some confidence that property values won’t decrease by nearly as much as they did in that crash. And that’s if they decrease at all.
With people fixating on the 2007 crash so much, they’re likely missing the importance of holding onto their investments even when conditions get rough. I have confidence that the average property owner who lost their job today would move mountains to try to keep their home. They’re not going to let that equity get pried from their hands. In June, home equity in the U.S. reached its highest recorded level ever.
During the 2007 crash, people were just letting their homes go. They’d lost all of their equity so what was the point of holding on? But today’s homes still hold more equity than ever. When homeowners run into tough times, they’re holding onto their properties for dear life. And fortunately, they have more helpful resources at their disposal than ever. They can use Airbnb to rent their home or garage out for extra income, not to mention gig work like rideshares and delivery services. Of course, the problem here is that retention keeps the housing market supply low.
A trend pointing to a brighter future came in June when the National Association of Realtors showed 31% of property purchases went to first time homebuyers. The millennials and Gen Z are no longer the transient generations. We’re seeing them beginning to settle down, possibly as a result of the pandemic. These younger generations became accustomed to working from home so they’re investing in more than a place to relax after their busy work day. Their home is their office.
Fortunately for them, this market is actually opportune for first time buyers. Competition is minimal and offers are being accepted as low as 3.5% down. Historically, down payments this low resulted in a huge backlog as offers got rejected left and right. Now, the buyer has regained some control.
When a journalist is talking about property values dropping, don’t just take it for granted. Could property values go down? Maybe. But I think they’ll most likely adjust between 3% and 5% and then we’ll see stabilization. And that’s an expert opinion from someone who’s been doing this for decades.