It’s been an interesting exercise watching the current real estate market. Where 6 months ago, having just dropped 8-10%, I would have predicted a continued drop in values of another 8-10%, instead the market has demonstrated surprising resiliency [Contact Tim here]. Rather than dropping further, prices are again rising and multiple offers are the norm, not the exception. To what do we owe this sudden move in the market?
You might not be surprised to hear that there aren’t a lot of homes on the market. We all can see the dearth of for sale signs in our neighborhoods. In fact, inventory is so low, it can safely be called a housing crisis. This is a phrase most associated with the Great Recession when we had tens of thousands of foreclosures and since no one wanted to catch the falling knife, demand was at an all time low. Coupled with 4 million active listings, prices naturally collapsed. Today our crisis is the opposite, while demand is muted thanks to rising prices and interest rates (affordability issues), supply is equally low. The ensuing tug of war between supply and demand has demand losing. That’s how low housing inventory has fallen. Where nationally we had 4 million active listings in 2008, today there are fewer than 1 million. And foreclosures? Black Knight reports that there are fewer than 100,000 nationwide. Why is that?
Just Sold!
People have equity to start with. So why get foreclosed on when you can sell and pocket a bunch of cash [Find out what your home is worth here]? Demographics are another large part of the issue. Millennials are still forming households and families and therefore trying to buy a home. Baby Boomers continue the trend of aging in place. Then you have the dramatic rise in interest rates and with more than 70% of homeowners holding sub 4% interest rate mortgages, many of those folks aren’t moving. Cash investors, looking for a natural hedge against inflation, represent nearly 30% of every transaction. And then there’s the residual effect of The Great Recession where for 5 years (2008-2012) we built a fraction of the homes we should have; we find ourselves playing catch up in an industry where catch up is literally impossible. We would have to have five years of 2X as many single-family homes built just to be where we were supposed to be if we had even kept up with normal production in the ensuing years following 2012 – which we haven’t. Where does this leave us?
Quite simply, spring 2023 is a seller’s market and for the moment, nothing on the horizon save for a possible recession, is going to substantively impact that.
Since the Fed has literally caused interest rates to double in the shortest time on record, it’s no surprise that the market is struggling to find it’s footing. How slow is it? I have statistics I maintain for my local market dating back to 2008 and today’s pending information does not look good. For example, in August of 2008 there were 314 homes under contract. In January 2009 when the market was in an absolute freefall, there were 260. A year ago, there were 296 but today it’s just 123 [
Inflation is running too high at over 8%, so to combat this the Fed has embarked on the most aggressive rate raising path in history; driving us into a housing correction and a recession. The Fed is doing what many of us would do and look to past experience as a guide on the best way forward but is that the right approach? In this case they’re following 1970’s and 80’s Paul Volker and radically pushing up interest rates. Never before have rates doubled in less than a year, let alone half a year. Unfortunately, this approach has come at the immediate expense of the mortgage business where massive layoffs have commenced in earnest. Let’s not kid ourselves however, this is no accident. The Fed sees the exponential increase in housing costs since the pandemic, both purchase and rental, as a core driver of today’s excessive inflation. But is it? It may be a contributing factor, but it’s not the whole enchilada by any means. None the less, The Fed figures if they can slow housing, they slow the economy which reduces demand and takes pressure off prices, reversing inflation. Home prices are coming down, many in the 8.5-10% range so far (
Here’s the problem as I see it, The Fed was late to reduce the rates and stop their bond buying, holding rates down for too long and now they are trying to make up for lost time. Okay, so mistakes happen, but driving us into a recession in my opinion, is a bad idea anytime. But do they have another choice? As with Maggie and her kid’s braces or Bill with his tires, of course they have a choice. In The Fed’s case, the alternate choice is to let inflation run hot. “That’s a terrible idea,” some will scream. But is it really? To answer this, you need to ask yourself, does demand alone cause inflation? I mean, after all, that’s all the Fed is doing by raising rates, clamping down on demand. By definition, inflation is too many dollars chasing too few goods. Prices go up in response to scarcity. As demand wanes, supply in theory goes up, but the supply doesn’t go up any more than the relative level of decline in demand. Imagine taking a weight off one side of the scale, the other side goes up by the relative change. The Fed itself has no influence on the larger issues affecting supply like supply chain disruption coming from the pandemic or the rise in energy costs as a result of the war in Europe. Even if demand went to near zero, the supply issues would continue. It’s my opinion that pushing us into recession will not be enough to slow inflation to the 2% rate that the Fed states is their target.
If you accept my premise, the question we and The Fed must ask is, of the two evils we are left with: inflation or recession, which is the lesser evil? I’d argue that recession is never the right answer and that until the supply side issues get resolved, it’s better to live with some inflation.
If you’re an old movie buff like me, you love Abbott and Costello. These guys always had movie titles where they “Meet” someone, ie” Abbott and Costello meet The Wolfman or Abbott and Costello Meet The Mummy. So why have a title Abbott and Costello Meet The Killer (Jerome Powell)? To understand this inside joke, you have to listen to Abbott and Costello’s marvelous routine “Who’s on first?” The gag has the two comics naming ballplayers that all happen to have interrogative pronouns for names. Who’s on first, What’s on second, I Don’t Know’s on third etc. So when Lou Costello asks “who’s on third?” Bud Powell answers, Who’s on first, I Don’t Know is on third. Lou: “I don’t know is on third?” Bud: “Yes.” Lou: What’s the guy’s name on third?” Bud: “I don’t know’s on third. What’s on second.” And so it goes until Lou eventually says “ I don’t know,” they simultaneously point and say “Third base.” Still makes me smile just writing it. The reason I chose this story to frame the current Fed dilemma, is because no matter what the Fed does, it’s inflationary
Hindsight is 20/20, so of course we can see that The Fed should have stopped their QE bond buying long before February 2022 and they should have started raising rates mid to late 2021. Heaven knows it was patently obvious to anyone in the housing trade that inflation was running amuck. That said, raising rates sooner would have helped for sure, but it would not have substantively changed our situation. Why? Two words: War and Pandemic. (
For example, The Fed is raising interest rates at an unprecedented pace without waiting for the effects to manifest. But this is designed to slow the economy, right? Yes but… higher US rates make the US Dollar stronger. A stronger dollar means Europe, England and Asia have to pay more of their weakened currency to buy American goods and services. This is globally inflationary. Those nation states in turn raise the price of their goods and you got it, inflationary. The Fed bought mortgage-backed securities, US and corporate debt known as Quantitative Easing or QE, as a means to get us out of The Great Recession and again when the Pandemic forced us to shut down the economy. So how does the Fed buy debt and where do those dollars come from? They have the Treasury print more money which is… inflationary. Now they have increased their balance sheet to a whopping $9 Trillion. They need to reduce that balance sheet and sell off that debt. 
This is known as Quantitative Tightening, or QT, and they began selling debt in early September. This is a good thing though, right? It puts pressure on rates as they are not only not a buyer (decreasing demand) but they are actually a net seller (increasing supply). This means more bonds in the market, which must be discounted to sell to a reduced number of buyers and this raises rates which slows the economy. This is another way to attack the demand side of inflation by effectively taking those excess pandemic dollars out of the economy. By removing dollars from the economy, the Fed is shrinking the Money Supply. Remember, inflation is too many dollars chasing too few goods. So, the Fed sells bonds in exchange for dollars and those dollars come out of circulation and are given back to the Treasury. Great news, right? Yes except… when you reduce the supply of something, in this case dollars, you make the value of the existing dollars go up, making the dollar even stronger against foreign currency which is, you guessed it, inflationary. Damned if you do, damned if you don’t. Anything the Fed tries will be inflationary so long as there’s a war in Europe and a supply chain issue. Crushing US demand will slow the economy and almost certainly drive us into a recession, but will it stop inflation? The answer is it will slow inflation and maybe reduce it some but no it won’t stop inflation. What will stop inflation is an increase in supply. You can’t stop inflation by only addressing the domestic demand side. That just punishes working Americans and American business. 
Back to rents; according to Zumper, rent on a 2 bedroom apartment in New York City, the most expensive market in the country, jumped year over year by an unconscionable 46.7%! But they aren’t alone. Nashville is up 26.7%; Boise 11%; Glendale, AZ 24.1%; Greensboro, NC 31.8%; Tulsa 23.3% – I could go on… it’s mind bending. I just listed a 500 SF 2 bed/1 bath flat in the heart of the San Fernando Valley for $2,050/mo and have had no fewer than 60 inquiries. This is not good.
In 1897 while traveling London, an article came out that Mark Twain had died. When asked by a reporter about this and his health, Twain replied, “Reports of my death have been greatly exaggerated.” So why this quote for a blog on and about real estate? Ahh.., because reports of the death of a seller’s market have been greatly exaggerated. Make no mistake, we are still in a seller’s market. Allow me to explain.
He goes on to say that amongst the many reasons that this has happened is that expired or cancelled listings are up 89% year over year! 
He says that with 72% of all active mortgages below 4%, that sellers are simply electing to stay put rather than fight the current of an adjusting market. 
Locally we see that the pending sales are down 15% and the number of homes for sale is up 15%. It’s the same 15%. This tight supply even in the absence of record high demand, is still woefully insufficient to cause the value of real estate to epically decline. Yes, we are seeing price cuts but this market behavior is consistent with a normal market. Historically prices rise in the spring and give some back in the fall. This is normal seasonal behavior. So, sellers who can no longer get what their neighbor got in the spring market, are having to reduce their price. There’s nothing unusual about that. Moreover, during the early part of 2022 inventory was at all time lows. In our local Conejo Valley, that number actually went below 100 homes for sale. In that environment, anyone with 4 walls and a kitchen could sell regardless of condition or location. This is no longer the case. Homes with warts or in locations that aren’t desirable or are in disrepair, are no longer selling at the sky-high prices. So here is a point of difference that’s not seasonal and strictly a situation being driven by the shift in interest rates, buyers’ affordability, and the fact that a slower market means more inventory [
provided you “Buy it right.” By this I mean, an appropriate discount from market price because when you go to sell, you have to discount it in the same way. What made our recent market unique was that the shortage of properties compelled some buyers to pay market for a challenged property and not buy with the appropriate discount. In a market like the one we were just in, everything sells. But in a normal market, that’s not how it works. And in a down market, that’s definitely not what happens. In a down market, there’s always a nicer home or better location that must sell at the same time and the discount you have to make often times ends up disproportionate. A home is only worth what a buyer will pay and if they can buy a better property than yours for “X” then you have to offer a discount to incentivize the buyer to buy yours.
The Real Estate Conversation 