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?
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.