By Strategic Passive Investments
With predictions like “a housing correction could be dead ahead” from Moody’s Analytics chief economist Mark Zandi ringing in their ears, many real estate investors around the country are liquidating assets and getting ready to buy, buy, buy just as soon as the housing fire sale shows up. However, investors should not count on a major housing discount bonanza in the near future – at least not on a national scale. Although interest rates are rising and inflation is likely to remain slightly over 9 percent for the remainder of the year, the demand for housing is strong so it is unlikely that the country will experience any type of crash on a national level.
Naturally, there will be regional downturns, dips, and other changes. Some markets may even experience new appreciation – albeit probably not the double digits to which we have all become accustomed – in the coming months. However, there are many reasons to believe there is not a housing “fire sale” coming in 2023:
First of all, there is a lot of equity in the market at present.
According to CoreLogic, homeowners with a mortgage have experienced an average equity gain of $55,300 just since the end of 2020. At the end of 2021, only about 1.5 million homes (less than 3 percent) were underwater. If home prices were to fall by 5 percent, that volume would increase only slightly to less than 5 percent of all homes.
Given that the CoreLogic Home Price Index (HPI) Forecast projects the home prices will likely rise by 5 percent over the course of 2022, then, by the same set of data, 141,000 additional homes will regain positive equity by the end of this year. As a result, the overall trend in the national housing market is toward distressed sellers having few options but, instead, distressed sellers being able to sell and at least pay off their mortgages even if they do not walk away with a great deal of money.
That is not a recipe for a fire sale or a housing crash.
Second of all, we are in an ongoing period of sustained underbuilding.
This means that there has been a trend for years, exacerbated even more by the lockdowns of 2020, wherein homebuilders are simply not meeting demand. This is partly because there is highest demand for the least profitable type of housing, “affordable” housing, and because there are many supply shortages and supply-chain disruptions that prevent builders from developing residential lands even if they are so inclined.
As more Millennials and Zoomers age into the stage of life at which they wish to own their own home, the demand for single-family residential properties is going to grow stronger instead of weaker, and the institutional acquisition of thousands of SFR homes for rentals will keep demand high from retail buyers, individual investors, and other funds and firms with SFR interests. This means that there will be competition for properties that will keep prices up even if they are no longer rising by leaps and bounds.
Third of all, the mortgage and lending markets are not unstable.
In the years leading up to the housing crash in the mid-2000s, it was not uncommon to see homeowners borrow nearly 100 percent of the cost of their home – often at a variable interest rate. Many people actually took out second loans to finance 5 percent down payments! This meant that when interest rates rose and the national economy became more volatile, those people had no time to react and definitely no way to come up with even one payment before they entered the foreclosure process.
The fallout was catastrophic for the global economy and millions of households.
Today, lending standards are much more stringent and, as discussed above, there are very few households on the brink of negative equity, much less in it. Traditional down payments are closer to 20 percent than zero, and, as Fitch Ratings managing director Kevin Kendra put it in a recent interview with Newsweek, “You could have a substantial market value or price correction, and yet our borrowers will still be positive in their equity. So I think it would have to be a pretty severe home price correction for many of these borrowers to go into a negative equity position.”
Housing Markets Facing Potential Distress
The key to successfully engaging in fire-sale buying, in the event that an investor wishes to do so, will be to watch local trends and react accordingly. Of course, if an investor is not experienced in a market or does not have a local presence, it will be important to work with someone who has “boots on the ground” and is able to network and negotiate locally to get contractors into properties, accurate estimates on repairs, and any necessary permits.
There are several trends that might indicate a market will soon experience a level of distress:
- Rising numbers of underwater homes in an area that is already relatively high
In Baton Rouge, Louisiana, for example, more than 14 percent of homes were underwater in Q4 2020. While this situation has been largely remediated since that time, markets with relatively high underwater rates are more susceptible to rising interest rates, inflation, and falling home prices. Investors may wish to focus lead generation efforts on markets like these.
- Oversupply in specific value tiers
While there is certainly extreme demand for “starter homes” in most markets, some luxury markets are beginning to soften because rising home prices place top-tier homes out of reach for most homeowners. Simultaneously, luxury markets are showing some resistance to inflation and rising interest rates because luxury buyers often do not react to these trends as quickly as buyers of middle- and lower-tier-priced properties. Although the time to act has probably not yet arrived, it is possible that real estate investors could benefit from oversupply situations in the next year or two.
- “Zoom Towns” experiencing significant declines in interest
Recently, Redfin announced that Boise, Idaho, one of the most popular destinations for new homebuyers, had crossed a threshold: More people were looking at Redfin with the intent of selling their homes and moving away from Boise than were looking at Redfin with the intent of buying a home and moving to Boise.
This was the first time that Boise, where home values have skyrocketed as West Coast households moved inland to the area, had crossed the line since Redfin started tracking it. Boise, Denver, Colorado; and Ogden, Utah; are all prime examples of areas of the country that may experience significant loss in home values and relatively dramatic declines in population as the COVID-19 pandemic becomes endemic and/or is brought increasingly under control.
Although demand for housing will likely remain strong, investors ready to act in these areas when households need to sell could find opportunities for solid acquisitions.
What’s Next for Real Estate Investors?
As the market changes, real estate investors will find themselves, as always, sitting in the proverbial “catbird seat,” thanks to an industry inclination to innovate and the creativity born of necessity that enables the majority of investors to think far, far outside the box when necessary. Watching markets of interest, self-educating on new strategies and regions, and being prepared to act when the time is right will keep smart, savvy investors going strong as they build their portfolios and turn the economic situation to their advantage.