Bubble Trouble: The Housing Crash Will Be Even Worse Than I Predicted
This is the fourth installment of Inman’s five-part Bubble Trouble series on the housing market’s unpredictable rise. Check back Friday for part five. This is the first of two opposing opinion pieces on the likelihood of a housing crash.
The homeseller market crash is worse than we predicted. If you are in the real estate or mortgage business, a year since the start of the pandemic in the U.S., you likely see the world as the haves and the have-nots — especially when looking at seller leads.
Let’s call this what it is: This is the homeseller market crash. Inventory is at historic lows, affordability is rapidly eroding due to price increases, and on top of that, rates are climbing. Simply put — more often than not, people who want to move can’t. There are no quick fixes, no inventory looming or about to flood the market.
In September, we predicted a nuclear winter for the housing industry, and much of that prediction has come true. The timing and scope of the prediction was accurate to start. As the inventory continued to fall in the winter months, however, we did not see this continuing to fall at this rate well into the spring sales season. It’s even worse than we predicted.
Why then are some looking at our industry with rose-colored glasses? Is the glass really half full? Some prognosticators are still predicting the “housing market will be strong in 2021,” and this baffles me. I believe they are taking a very narrow-minded look at the market.
For starters, some projections are typically only looking at price. Obviously this type of statement is ignorant and misguided. Those of us who’ve been in the industry for more than a hot second understand that sustained housing volume is what makes a strong housing market and feeds mortgage, title, real estate, photography, inspections, and repairs to name a few.
If those of us in the industry are to make forecasts — it’s not going to be made on median home sale price alone.
Furthermore, price instability and the upward trend has stopped people from being able to buy, as affordability is out of the question in many markets for the majority of potential movers.
Using realtor.com’s public March 2021 data, we can paint a pretty clear picture of the situation.
- The median list price in the U.S. is up to $375,000, or an increase of 17 percent year over year.
- The average days on market is down 31 percent to 43 days on market (DOM).
- There are only 491,900 active listings in the U.S., a stunning drop of 53 percent year over year.
“On Black Monday, Oct. 28, 1929, the Dow declined nearly 13 percent. On the following day, Black Tuesday, the market dropped nearly 12 percent,” according to Federal Reserve History. This 25 percent drop in the stock market is referred to as the stock market crash, but it would continue to free fall for over a year. Certainly if real estate transactions/supply drops more than 50 percent in a year, it’s worthy of being called an industry crash.
In the 1980s, house prices were low, yet mortgage rates were in the upper teens. This limited movers due to affordability. Today, we see the opposite. Prices are skyrocketing, and rates are historically low — yet the same problem exists for buyers.
The past three years have had an impressive gain in prices, with the last year blowing the roof off at 16 percent year over year. For comparison, from 2000 to 2016 on average, nationwide home prices increased a total of 32 percent.
Is now the time to rent?
The classic real estate phrase “now is the time to buy” could not be farther from the truth at this point in time in most of the U.S.
Seller-turned-renter could be an attractive tool for agents looking for listings, and it could help solve the inventory problem.
Renters are changing the market today. Anecdotally, we are hearing from people who sell their property for a high price, giving them significant cash in hand and moving into long- and short-term rental properties.
While I’d love to share specific data on this, I’ve not been able to at this point. Realistically, we are talking about a small, perhaps 10-15 percent subset of sellers who would opt for selling and renting for the short term. However a 10 percent increase of inventory would be significant.
Movers are going to move if there is a property for sale or not. And they will choose the best financial option most of the time. Today, only 15 of the 50 largest metros are more affordable to buy versus rent, in January 2021, according to a recent realtor.com report. The paradigm has shifted. This realization in addition to rising interest rates and lack of inventory will cause buyers to look for other options, like rent.
They say renting comes with a cost, that rent will always go up. However, rent rates in March are up 1.1 percent year over year (in the top 50 markets) or are relatively flat, while home prices have leaped up 17 percent year over year. This is good news for movers who can’t find a place to buy.
The other good news for movers is that there is 15.8 percent more rental inventory now than a year ago. (Currently, there is 6.8 percent rental vacancy rate in the U.S.)
Buyers and sellers who can’t find what they want and won’t, or can’t, “overpay” will select this option. These new renters will be out of the buyer’s market for the length of their contract.
This could be a great thing for the individual, and it would help reduce the demand side that is pushing prices up. Perhaps this segment of seller-turned-renter will never return to buying if prices continue to increase — or perhaps they return to the market in six months to a year.
If you can convince your mover to sell for top dollar — where do you help them move? Try renting. Seriously. So, selling now and renting might be a temporary solution while your client awaits the return of inventory and the normalization of prices.
Invitation Homes currently owns more than 80,000 single-family rentals in 17 markets. Formerly owned by Blackstone, it started in 2012 in the depths of the financial crisis and went on a buying binge. Currently, Invitation Homes is sitting on a gold mine. Invitation has a reserve of properties that it can (and probably ought to) sell for top dollar.
So, perhaps your next real estate business ought to involve placing renters?
Chris Drayer is the co-founder of Revaluate. Connect with him on LinkedIn and on Twitter @FPO.