Housing Market Softness?

Welcome to the Skeptical Investor Newsletter. A frank, hopefully insightful, dive into real estate and financial markets. From one real estate investor to another.

This week, we’re talkin’ home price deceleration. It’s happening. And it’s a good thing.

Let’s get into it.

Plenty of pundits, housing analysts, and realtors are saying we are seeing some “softness” in the housing market.

I must say, I dislike that word, “softness.” It’s such a cop out term, and doesn’t really describe anything, especially the nuance of how home prices trend up, down and all around. And it reminds me of that scene in The Big Short where the Florida realtor has no idea what’s happening and brushes off the impending market crash saying, “the market’s in an itsy-bitsy little gully right now...”

So are we in a “gully,” circa 2008?

No. Stop it. Not even close.

The housing market is remarkably strong, and price fluctuation is a good thing. It’s normal. And no, I’m not trying to Obi-Wan Kenobi hoodwink you like a couple of dullard stormtroopers (God, what a great scene).

The fundamentals of the US economy are, in fact, quite strong (keep reading).

Prices don’t always go up, and if they did, we wouldn’t have a market.

So, this is not “softness,” it’s just the cycle. And the housing market, like all markets, cycles. Prices fluctuate. The significance of price fluctuation is indicative of:

Remember, home prices went absolutely bonkers from 2020-2022. We had 40% back-to-back price increases from 2020-2022, doubling prices. That is more than 5x faster than the typical cycle.

Wild and not sustainable and driven by low interest rates.

Since then, rates have remained high, so….price increases are muted. And it took a while for the demand in the system to shake out.

Hard to tell, and usually we know only with the benefit of hindsight. Hell, this could be the bottom of a shallow cycle. And if the Fed starts to lower rates in September, it likely will be, in my humble opinion.

For context, in the end of 2023, RedFin CEO said real estate activity was 'dead as a doornail.' Well, it kept on chuggin’.

But he wasn’t totally off base. He saw the data and was warning about demand waning because of sticky interest rates, saying “…people are just really [mortgage] rate sensitive.”

On that point, he was very much correct. Albeit a little early.

Most major housing price indexes are still seeing postive growth YoY. We are pretty much flat now.

Depending on the city, of course. Some up, some down.

Again, it is the rate of increase that is significantly slower today (above), not overall price levels (below).

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What we have is an imbalance of buyers and sellers, as interest rates continue to take their pound of flesh. According to RedFin, there are 500,000 more sellers than buyers active in the market. We have ~1.9 million home sellers and ~1.5 million homebuyers. Now, I don’t like being bit. But as price increases cycle down, historically it is usually a good time to buy, if you can afford it and can stomach the rate.

Moreover, it’s not that we have more and more listings by sellers, it's that homes listed on the market are sitting and not selling as quickly.

In fact, new home listings are way down (Housing Wire). Still too many folks with 4% mortgages not wanting to sell and buy a place with a 7% rate.

The drag from interest rates continues to depress affordability/demand.

As investors, what we should be doing is looking forward in the cycle, 6-12 months. Two data points I like to pay attention to are housing unit completions and new building permit applications, which of course also have their own cycle. This signals future housing supply, affecting both rent and home prices. Landlords should take heed.

It took a while to shake out, but housing completions are finally, and now quickly, coming off the low-interest-rate sugar high, closing in on 2019 levels.

And with permit applications to build falling...

…new supply will continue to fall down the elevator.

Builders are telling us that there aren’t enough buyers who can afford the mortgage at these rates, which is why today we are seeing the supply of listings to build on the market.

Why is this important?

Future supply will be depressed, and there will be a multi-year cycle.

Why?

Because it takes a while to build a house, and even longer to build an apartment building, starting another up-cycle in prices as supply will be unable to meet demand.

Good for investors buying in 2025.

When? Well, it all depends on how long we are stuck in interest rate purgatory.

Could be 6-18 months out.

I will be watching the September Fed meeting, and the reaction by the bond market closely.

Folks’ finances are strong. Again, activity is down because of rates. Real estate is the most sensitive sector to interest rates because today ~67% of buyers purchase their home with a loan. When rates were low, it was ~74%

In my 42 years of life, we’ve had 1 home crash, and it was because of the systemic financial problem with housing finance and sleepy regulators. We don’t have that today and households are in great financial shape.

Remember, when home prices increase, that is real homeowner wealth growth, and just like cash in your bank account, except it’s in your property’s piggy bank.

Today, homeowners are sitting on $34 trillion in home equity value.

Just look at that ramp-up post-GFC, then post-COVID.

Want even more piggy bank money? Buy a place and add vlaue

Do this:

Every dollar you put into a renovation should give at least a 50% return dollar for dollar in property value. Want help calculating this? Here’s a great book.

Probably not.

The single most important part of real estate is finding a deal. If you can do that, everything else will follow.

BUT if you think you must get some help, for the love of god do not buy an expensive course, “coach,” or “mentor.”

Get professional advice from someone who actually owns, manages, and brokers real estate.

You can consult with me, The Skeptical Investor.

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Ok, back to business.

Lastly, interest rates. And I’m done harping on them this week, I promise. I'll just show you this chart by Lance Lambert (great follow).

We are now in year 3 of interest rates being virtually range-bound between 6.5%-7.5%.

Just crazy, this can’t last much longer. And won’t. The President has made that clear for his next Fed Chair pick.

I’m still thinking September for a .25% rate cut. But this could change. So don’t stop reading :).