The Reckoning of the Housing Market
By Sean Crosier, a CA Real Estate Broker | Published Aug 12, 2022 | 9 Minutes
Will the Housing Market Crash?
A broker’s perspective
It’s finally happening. The overdue reckoning of the red-hot housing market. For many years I’ve felt the pace of home value appreciation seemed unsustainable. Perhaps I was too conservative then, but I remember back in 2014 and 2015 telling clients that I was unsure if this kind of housing appreciation could continue; I said that I felt the market had already corrected itself from the crash of 2008 and it should normalize soon. Boy, did the market try to prove me wrong… the appreciation, then hyper-appreciation, lasted way longer than I expected it to. We are now finally at the point of reckoning.
Lending Guidelines
After the crash of 2008, lending guidelines became much more stringent. Those strict lending guidelines did what they were supposed to do; ensure that people buying homes could actually afford them on paper. Strict guidelines like this help protect us from an all-out crash and foreclosure crisis like we saw in 2008.
Supply, Demand, and Competition
What I didn’t see coming was that we’d have this pocket-sized, low supply of housing, with outrageous demand, coupled with so many cash buyers (investors, iBuyers, ‘bridge loan buyers’ aka ‘buy with our cash before you sell buyers’, move-up buyers, and the wealthy). Having such a limited supply of homes pushed buyers to have to seriously compete when writing offers. Typical homebuyers who saved up for their down payment, be it 3.5% down, 10% down, or 20% down, don’t have a chance competing with these cash buyers.
It’s not just the fact that these buyers are all cash. In order to succeed over multiple offers, these cash buyers were having to write offers way over asking with no contingencies whatsoever; not even an appraisal.
If you are a typical home buyer getting a loan and already putting as much as you can down, it is incredibly risky to waive the appraisal contingency because if it appraises for less than the agreed upon purchase price, the seller will have to agree to reduce the price or, the buyer would have to come up with the difference to make the loan work. With some exceptions, no seller in their right mind would reduce the price when they’ve got plenty of backup offers who will buy their home with no appraisal; so, as a buyer your, only option is to come up with the difference or cancel, which could be a breach of your contract since you didn’t have an appraisal contingency allowing you to cancel if it comes in low.
All of this really upended the typical homebuyer. Your average home buyer had to rely on love letters to sellers (now somewhat frowned upon by the real estate industry due to potential fair housing violations), or rely on their real estate agent to either have a relationship with the listing agent or use some crazy strategy to try and win the bid over other buyers… No seller in their right mind would accept an offer from a buyer getting a loan that was $50K or $100K less than a cash buyer, just because they ‘liked’ the buyers or that their agent vouches for the buyer’s agent. Regular buyers were no match for these cash buyers.
Impact of Mortgage Rates on Buying Power
In addition to all of this, home loan rates were historically low. Almost free, you could argue, especially given the current high rate of inflation. In late 2020 home loan rates were in the 2% range, which was previously unheard of. Since rates got so low, there came an unusually high number of active homebuyers who could afford higher prices than when rates were higher. This added jet fuel to the fire.
Today, home loan rates are at about 6% and the jump happened rather quickly; home loan rates went from around 3% in early 2022 to about 6% as of now (August 2022). This quick uptick in rates lowered people’s buying power substantially. For example:
To buy a $700K home with 20% down at 3% on a 30-year fixed rate home loan, your monthly principal and interest payment would be $2,361.
To get that same monthly mortgage payment of $2,361 given today’s rate of approximately 6% on a 30-year fixed, the purchase price would have to be $492K.
That recent 3% increase in rates lowered home buyers buying power, and price range, by $208K. That means those buyers who could afford a $700K home 6 months ago, can only afford about $500K today.
That is absolutely substantial; a 30% decrease in buying power for almost every non-cash buyer in the market.
That is staggering! What do you think that means for home sellers? Fewer buyers, less buyer competition, lower offers, price reductions, etc. This is what is actually happening in the market right now, today. I see it first hand.
Despite all of the very smart industry leaders knowing that this was coming, it’s only now finally reaching the news.
Will the Housing Market Crash?
Real estate industry professionals will tell you that the real estate market is normalizing. In my opinion that is accurate. The market is definitely normalizing. We are already seeing the first signs of this: price reductions, increased time on market, more inventory, lower sales to list price ratio, fewer existing home sales, and more.
You will also hear the professionals say values will still increase, but at a lower pace. That’s also accurate, and it’s happening now as we look at the most recent data, but it’s happening faster than most will admit. The slowing of appreciation without a decline in prices may be true in the short term for 2022, but I’m not so confident for 2023. My opinion is that we will see a slowing of appreciation, through 2022, flat through the holiday season, and then a decrease in prices in 2023. I do not anticipate a rapid crash unless something unforeseen happens in the world or with the stock market.
What Does This Mean for Home Buyers and Sellers?
It is still okay to buy or sell a home, however, you need to make sure you understand the market, choose the best strategy for you and be realistic with your expectations.
Home Buyers: If you are a buyer, be cautious, make sure you get an appraisal, and plan on staying put in the home for at least 5-7 years. Make sure you are secure in your job and make sure you can afford the payment comfortably. You’ll still get the applicable tax benefits and have the pride of homeownership even if the market stays flat or decreases. Remember, you are only subject to what’s happening in the market when you sell or refinance and you always need somewhere to live; so typically buying is much better than renting, even in a market like this. Real estate is a market that you have to think long-term about, especially regarding your primary home, and you need to expect to hold on through the ebb and flow. If you ever have to move and you don’t want to sell, you can always rent out the home.
Home Sellers: If you are a seller, remember that even if there is a decline in prices, as long as you sell and buy in the same type of market, you are not worse off. Practically speaking, if you get that perfect new home that fits your current needs, you are better off. Don’t think of it like you lost money since the value decreased because you would have also had to buy at a high price. Yes, if you had a plan to move into an RV and traverse the country and stay out of the real estate market, selling at the peak would have been better, but it is what it is now.
It definitely is important for you to price your home ahead of the declining market. That means you need to price your home a little below your competition. If you don’t, your home will sit on the market longer than you want, and then it will sell for less than it would have had you priced it right up front. Pricing ahead of the market is really a basic pricing strategy that works in an increasing market too.
As always, you will want to be smart about who you hire to sell your home. Hiring a full-service agent can cost you a pretty penny. In a declining market, sellers always feel the pinch because it feels like you lost money by not selling earlier. You will want to save as much as you can on commissions. Homepie has many product offerings to help you sell your own home and avoid listing side agent commission. Due to the way buyers find homes these days on the major portals, it’s difficult and often more costly to try and avoid paying a buyer agent commission, so I would suggest you calculate that into your estimates. Make sure what you offer the buyer’s agent is comparable to what the competition is paying.
Bottom line… It’s not all doom and gloom if the real estate market corrects itself. It’s actually a good thing because it will allow more people to realize the dream of home ownership once things get back to normal and we are in a balanced market. Countless buyers were priced out of the market due to hyper-appreciation so now there is hope for them. It was a very fun hayday for sellers for a very long time but that is coming to an end and there is nothing we can do about it.
Whether you are buying or selling in this market, be sure you are informed and make sure you have realistic expectations. Remember that real estate is not going anywhere. It’s here to stay so make the best of the opportunity it gives us all.
